How Long will it Last? Fixed Terms in Employment Contracts
By: Robert Stack, Wilson Laycraft
Originally published February 18, 2022
Most employment contracts in Canada are pretty “open-ended”: they are unwritten, and it is not clear how long they are going to last. The absence of written terms and set termination dates can create uncertainty, but contracts with “fixed-term” end dates are not necessarily easier to interpret or manage. One challenge is to determine whether the contract has a fixed term at all – sometimes it is hard to tell. Another question is: how do rules about “mitigation” (the dismissed employee’s duty to look for other work) apply to fixed-term contracts that are terminated early? Both these issues recently came up in an Alberta employment case reviewed by the Alberta Court of Appeal, Rice v Shell Global Solutions Canada Inc, 2019 ABQB 977, 2021 ABCA 408.
The Plaintiff employee in that case was an accountant who held the number of jobs with different Shell entities starting in 2008. She had gone from fixed-term contracts to regular “indefinite” employment. Then the employer asked her to reapply for her role as an “Indirects Manager”. The offer letter for this last position stated that: “Your Assignment Length will be: 4 years.” However, Ms. Rice was terminated just after a year into her new role. She claimed that the 4-year “Assignment Length” amounted to a fixed-term of employment, and she was entitled to compensation for the remainder of the term, some 34½ months. Shell took the position that “Assignment Length” simply referred to the time that the individual would spend in a particular role, and “reasonable notice” should be paid instead. A reasonable notice period in Rice might have been a third the value of the unexpired term of the contract.
In his decision after the initial trial, Justice Eamon of the Court of Queen’s Bench noted case law indicating that courts presume employment contracts are indefinite; only unambiguous language in an offer or contract document can create a fixed-term. While the finding of an indefinite contract in the Rice case would not have been good for that Plaintiff, this general presumption against fixed terms is designed to protect employees. For instance, a series of fixed term contracts renewed annually could keep someone employed with the same employer for decades, but might end with no notice at all after many years of service.
In the case at hand, Justice Eamon found that the phrase “Assignment Length” could be reasonably viewed as referring either to a term of employment or time spent in a role. Therefore, the Court concluded that the language was too ambiguous to be the basis for a finding of a fixed term employment contract.
However, Justice Eamon did think it necessary to apply some meaning to the words “Assignment Length”. He concluded that the Plaintiff’s employment term had to continue for at least the promised four years, but it would not necessarily come to an end after those four years. This “hybrid” contract was employee-friendly: the Plaintiff got the benefit of guaranteed employment for a fixed term, but her employment did not necessarily end after the 4 years.
The finding that Shell was bound by the 4-year term did not mean that the Court would order it to keep the employee working during the whole term; it just meant that if Shell terminated that employment early, it had to pay her the remaining value of the contract. But what if Ms. Rice found alternative work before the end of the 4 years? Should income from that work be deducted from the wrongful dismissal?
Ms. Rice had in fact reduced her losses by finding new work. The employee and the employer disagreed about whether her earnings from this job should be deducted from her damages. While earnings within a notice period for an indefinite term contract are almost always deducted from a wrongful dismissal award, there has been some debate as to whether such a mitigation deduction should occur after the early termination of a fixed-term contract.
Some courts have treated fixed-term and indefinite contracts the same in terms of mitigation and required a deduction. Others have concluded that an employer that brings a fixed-term contract to an early end must pay out the balance of the contract, regardless of subsequent earnings. This is after all what the employer originally promised to do – pay a certain amount of money over a certain amount of time. An important more recent authority in this line of cases is Howard v Benson Group Inc (The Benson Group Inc), 2016 ONCA 256.
Justice Eamon noted divided authority in Alberta on this issue, but concluded that the balance of judicial opinion in Alberta is that an employee under a fixed term contract does have a duty to mitigate, just like an employee under an indefinite contract. He declined to follow Howard and similar cases. As a result, Shell’s liability was reduced by Ms. Rice’s earnings after termination.
Shell appealed the finding that it was bound to employ the Plaintiff for four years or pay out her contract, arguing again that it only had to pay damages in lieu of “reasonable notice” on termination. The Court of Appeal concluded that it was reasonable for Justice Eamon to rule as he did on the question of the term of the contract.
The reasons for decision of the Court of Appeal and the Court of Queen’s Bench on the issue of the term of the contract are not identical. However, both courts focused on the context of the offer of employment to determine what the parties may have intended by the words “Assignment Length”. Justice Eamon noted that during the term of the assignment the employee would have assumed that she could not have applied for another job at Shell. She was bound or limited in that sense. The Court of Appeal noted that the employee’s prior indefinite contract had been terminated without notice as part of a reorganization. She thus perhaps relied on the security of the 4-year term in not advancing a wrongful dismissal claim for the earlier job and in accepting the new role. The Court of Appeal also noted that the employee could have assumed that Shell wanted a fixed-term arrangement in the context of a restructuring, a downturn in the oil and gas industry and the need for someone to fill a role on a specific project.
The issue of mitigation and fixed-term contracts was not raised on appeal, so we do not know the Court of Appeal’s views on the subject. It is likely this issue will continue to come up at the trial level until there is a Court of Appeal decision on it. In fact, there is likely more than one outstanding mitigation issue with fixed term contracts: When an employer terminates a fixed term contract early, does the employee have to look for work before the term ends? If there is no duty to mitigate, what happens if the employee takes a new job any ways? Should a deduction be made for actual earnings then? Based on the Queen’s Bench decision in Rice, employers will likely say the answer to any of the above questions is “yes, employees should mitigate and courts should deduct these earnings”, but employees may continue to argue employers should pay out the promised fixed term.
The lesson of the Rice case for employers is to be careful about putting any wording into an offer letter or contract that suggests employment may last for a fixed period. An employer found to have offered a fixed-term arrangement may be bound to pay out the term, even when it finds the arrangement is no longer working. In a “hybrid” situation as occurred in Rice, an employer may have to honour a promise to employ a person for a set period and yet still have severance obligations once that period is over, a situation that could be the worst of both worlds from the employer’s perspective.
The lesson for employees is to read carefully whatever offer documentation is provided. Fixed-term contracts are not always favourable for employees. Once such a contract runs its term, there is no pay in lieu of notice of termination. At the same time, if the terms of the offer appear to suggest employment for some form of term, an early termination may lead to a larger wrongful dismissal claim than one based on years of service and other traditional factors.
If the parties do intend to enter into a fixed-term contract, it may also be a good idea to have an express term dealing with mitigation in the case that employment is terminated before the end of the contract. Until the Court of Appeal of Alberta rules on this issue, there may continue to be uncertainty about it. Employees and employers both have an interest in avoiding the costs of litigating over uncertainties in the law and ambiguous language in offer letters and contracts.