First posted December 2014. Updated February 2017.
Erin Brandt, Contributor.
Ideally, an employer and employee enter into a new working relationship with optimism, expecting that theirs will be a long-term, mutually beneficial arrangement. In such cases, they likely won’t specify a finite period of employment. Although they may sign a contract that describes what happens if the employee quits or is fired, they don’t place any actual limits on how long the job will last.
In employment law, we describe this situation as a contract of indefinite term. One advantage to an employee of such an agreement is that she will be entitled to “reasonable notice” of dismissal or severance pay in lieu, unless her contract explicitly limits her entitlements on termination (or she was dismissed for just cause).
On the other hand, some employment relationships are short term or temporary by necessity, such as when an employee is hired to complete a discrete project or fill a mat leave position. In these situations, the parties will often sign a contract that sets out how long the employment will last and when exactly it will end. We call such agreements fixed-term contracts.
One benefit to employers of a fixed-term contract is that when the employment ends on the date specified (subject to the cautions set out below), the employee is not entitled to reasonable notice or severance. However, there are also potential risks to using fixed-term employment contracts in your business.
Here are five things to consider before asking your employee to sign on the bottom line:
- Is the contract wording clear? To create a fixed-term, you must use explicit, unequivocal language. For example, simply referring to a two year period will likely not suffice – make sure to include specific dates.
- Are you and your employee on the same page? Don’t just rely on the wording of the contract – explain to your employee what the fixed-term nature of your relationship means. Consider providing her with a cover letter or memo to this effect to help avoid any future misunderstandings (or unexpected claims for severance).
- What happens on early termination? If you dismiss the employee before the fixed-term ends he may be entitled to some compensation, depending on the timing. The employee has a duty to mitigate his damages by looking for other work, of course, but you may still be liable for some (or all) of the term remaining. To avoid this, you can include a clause detailing what happens on early termination of the contract. Again, the need for cautious drafting arises, since an improperly worded clause could lead a court to find that you intended to contract for an indefinite duration.
- Is the term really “fixed”? If an employee continues working for you after the fixed-term is over without signing a new contract, your relationship may be deemed to be one of indefinite duration. A similar result might occur if the employee has signed a series of fixed-term contracts, one after the other, covering a significant period of time. In either situation, the employer runs the risk of unanticipated liability if and when the employee is dismissed.
- Is a fixed-term contract really necessary?If your goal is to avoid an excessive severance payout on termination, you may still be able to accomplish this with a well-drafted termination clause in a contract of indefinite employment.
While the above tips should help employers manage their financial risk, more importantly, they are consistent with what we call sustainable employment practices. A well-written, legally compliant contract that both parties understand and agree to depends on clarity, fairness, transparency and collaboration – all of which are key to a successful, sustainable workplace relationship. Learn more about sustainable employment here.