Fixed-Term Employment Contracts: What Are the Risks for Employers?

With contributions by Erin Brandt (nee Kizell), Lawyer.

fixed term 1Some employment contracts specify an employment end date, and others don’t. Why should employers choose one or the other? At the end of the day, is there really any difference?

Often, an employer and employee will enter into their new working relationship hopefully, with the expectation that theirs will be a long-term, mutually beneficial arrangement. In such cases, the parties typically choose not to specify a set term of employment. Although they may decide to sign a written contract that describes what happens if the employee quits or is fired, no actual limits are placed 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 receive “reasonable notice” (or pay in lieu) of her dismissal, unless her contract contains a clause that expressly limits her entitlements on termination (or she was dismissed for just cause).

By contrast, certain employment relationships are short term or temporary by nature, such as when an employee is hired to complete a discrete project or to fill in for someone off on maternity leave. In these situations, the parties will often sign a contract that sets out a specific term of employment and termination date. We call such agreements fixed-term contracts.

One benefit to employers of a fixed-term contract is that when the employment ceases at the end of the term (subject to the cautions set out below), the employee is not entitled to reasonable notice. However, as with any type of contract, employment or otherwise, there are a number of 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:

fixed term 3

1. Is the contract wording clear? To create a fixed-term of employment, 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.

2. 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 claims for severance when the term ends.

3. What happens on early termination? If you dismiss the employee before the fixed-term ends, depending on how much time is remaining on the contract, he may be entitled to some compensation. The employee will have an obligation to mitigate his damages by looking for other employment, of course, but you may still be liable for a portion (or the entirety) of the term remaining. One way to avoid this liability is to include a clause in the contract detailing what happens if you terminate his employment before the fixed term ceases. Again, the need for cautious drafting arises, since an improperly worded early termination clause could lead a court to find that you intended to contract for an indefinite duration.

4. 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.

5. Is a fixed-term contract really necessary? If your goal is to avoid a large severance payout on termination, you may still be able to accomplish this with a well drafted termination clause in a contract of indefinite employment.

Need helping drafting your employment contracts? Contact us!

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