Fixed-Term Contracts: The Most Expensive Mistake in Canadian Employment Law

The Trap That Keeps Catching Employers

There is a persistent misconception in Canadian employment law that fixed-term contracts are safer for employers. The logic goes: hire someone for a defined period, and when the term expires, the relationship ends cleanly. No severance, no reasonable notice, no litigation.

That logic is correct — when the contract expires naturally. But when an employer terminates a fixed-term contract before the end of the term, the consequences are catastrophic. The employee is entitled to compensation for the entire remaining value of the contract. Not reasonable notice under the Bardal factors. Not some pro-rated amount. Everything.

The Ontario Court of Appeal made this devastatingly clear in Howard v. Benson Group Inc., 2016 ONCA 256.

Howard v. Benson Group: The Case That Changed Everything

David Howard was hired as a financial advisor under a five-year fixed-term employment contract. Just over two years into the term, Benson Group terminated him without cause. The company offered him a severance package based on reasonable notice principles — the standard approach for indefinite-term employees.

Howard sued for the balance of his contract — approximately the remaining three years of compensation.

The Ontario Court of Appeal, in a decision that sent shockwaves through the employer-side bar, sided with Howard. Justice Laskin, writing for the court, established several critical principles:

1. **Early termination of a fixed-term contract without an enforceable termination clause entitles the employee to damages for the unexpired portion of the term.** This is not calculated using *Bardal* factors (character of employment, length of service, age, availability of similar employment). It's a straightforward contractual damages calculation.

2. **There is no duty to mitigate.** Unlike indefinite-term employees, who must take reasonable steps to find alternative employment (and whose damages are reduced accordingly), employees on fixed-term contracts have no such obligation. The employer owes the full amount regardless of whether the employee finds new work the next day.

3. **The termination clause must explicitly address early termination of the fixed term.** A generic termination clause drafted for indefinite employment — even one that references the *Employment Standards Act* minimums — will not save the employer.

Why the Damages Are So High

To understand why fixed-term contract terminations produce astronomical damages, consider a concrete example:

An employer hires a senior manager on a three-year fixed-term contract at $200,000 per year, plus benefits. After six months, the employer decides to restructure and terminates the manager without cause. There is no early termination clause in the contract.

Under Howard v. Benson Group, the manager is entitled to:

- $500,000 in remaining salary (2.5 years x $200,000)

- Benefits continuation for the remaining term, or compensation in lieu

- Any bonuses that would have been payable during the remaining term

- Potentially vehicle allowances, pension contributions, and other contractual entitlements

Compare this to the indefinite-term analysis. The same manager, hired for an indefinite period, might receive 3 to 6 months of reasonable notice based on their limited tenure. The difference between the two outcomes is staggering — potentially hundreds of thousands of dollars.

And the employee has no duty to mitigate. Even if they find an identical job the next month, they keep the full amount. The Supreme Court of Canada confirmed in Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, that fixed-term contract employees are not required to mitigate their damages because the employer's obligation is to pay for the term, not to provide reasonable notice.

The No-Mitigation Rule: Why It Matters

The duty to mitigate is one of the most powerful tools employers have in wrongful dismissal cases. When an indefinite-term employee is terminated, they must make reasonable efforts to find comparable work. Any income earned during the notice period is deducted from the employer's liability.

Fixed-term contracts eliminate this tool entirely. In Howard, the Court of Appeal relied on the principle from Hamilton v. Open Window Bakery that the nature of the fixed-term agreement creates a specific, quantifiable obligation. The employer promised to employ and pay the employee for a set period. Early termination is a breach of that promise. The damages are the unfulfilled portion of the promise. Mitigation doesn't enter the analysis.

This principle was further confirmed in Monterosso v. Metro Freightliner Hamilton Inc., 2023 ONCA 413, where the Court of Appeal reinforced that early termination of a fixed-term contract without a valid early termination clause results in damages for the balance of the term, with no duty to mitigate.

The Termination Clause Problem

Employers might think the solution is simple: include an early termination clause in the fixed-term contract. But this is where drafting becomes critical — and where many employers fail.

Ontario courts have been aggressive in striking down termination clauses that fail to comply with the Employment Standards Act, 2000. The leading case of Waksdale v. Swegon North America Inc., 2020 ONCA 391, established that if any termination provision in an employment contract violates the ESA — even one that is not being relied upon — the entire termination scheme is void.

Applied to fixed-term contracts, this means:

- The early termination clause must, at minimum, provide the employee with their ESA entitlements.

- The clause must be clear that it applies to early termination of the fixed term, not just to indefinite employment.

- If the clause is ambiguous, courts will construe it against the employer under the *contra proferentem* doctrine.

- If any related termination or just cause provision in the same contract violates the ESA, the entire termination framework — including the early termination clause — may be unenforceable under *Waksdale*.

The Renewal Trap

A related problem arises with serial fixed-term contracts. When an employer uses successive fixed-term contracts — renewing or extending them repeatedly — courts may find that the relationship is, in substance, an indefinite employment relationship. This eliminates the fixed-term protections for the employee (no duty to mitigate, full remaining term) but also eliminates the employer's ability to claim the relationship has a defined end date.

In Ceccol v. Ontario Gymnastics Federation, 2001 CanLII 8589 (ON CA), the Ontario Court of Appeal held that where an employer uses a series of fixed-term contracts over many years, the court may find the relationship to be indefinite, entitling the employee to reasonable notice upon termination. But critically, the court noted that the characterization depends on the totality of the relationship, and there is no automatic rule.

The worst-case scenario for employers: a court characterizes the relationship as a series of fixed-term contracts (not indefinite), finds no enforceable early termination clause, and awards damages for the balance of the current term with no duty to mitigate. Employers get the worst of both worlds.

What Employers Should Do

Fixed-term contracts are not inherently dangerous. They serve legitimate business purposes — maternity leave replacements, project-based work, seasonal positions. But they require careful drafting:

1. **Include an enforceable early termination clause.** This clause must comply with the ESA and must specifically address early termination of the fixed term. Generic termination language is insufficient.

2. **Don't use fixed-term contracts for ongoing roles.** If you need someone indefinitely, hire them indefinitely. Using a fixed-term contract to create a false sense of flexibility is a liability trap.

3. **Avoid serial renewals.** If you're renewing the same fixed-term contract for the third or fourth time, you don't have a fixed-term relationship — you have an indefinite one. Structure it accordingly.

4. **Get the contract reviewed by employment counsel.** Post-*Waksdale*, the margin for error in termination clause drafting is razor-thin.

The Bottom Line

Fixed-term contracts are the most expensive mistake in Canadian employment law. An employer who terminates a three-year contract after six months — without an enforceable early termination clause — is on the hook for two and a half years of compensation with no credit for the employee's mitigation efforts. The numbers can be breathtaking.

Howard v. Benson Group is unambiguous. Hamilton v. Open Window Bakery is settled. And Waksdale has made it harder than ever to draft enforceable termination clauses. Employers using fixed-term contracts without proper legal advice are playing with fire. And the fire burns in one direction.