Avoiding the Term Contract Trap

“We’re here for a good time… not a long time.”  

                                                            Trooper, “Hot Shots”

Without a doubt, one of the most common bits of advice I give to employers is “Stay away from limited-term employment agreements”. 

Limited-term (or “defined term”) employment contracts can be a useful and effective tool for structuring employment relationships.  In my experience, however, there are 4 common outcomes from the use of limited-term employment contracts and 3 of them are undesirable.  Those aren’t good odds. 
The Good News 
The purpose of a limited-term employment contract is to document a relationship which is truly time-limited.  The employer hires the employee for a particular period and when the contract expires the employee simply departs (no notice, no pay in lieu of notice, no problem… right?). 
This use of a limited-term contract is perfectly legitimate and, properly utilized and administered, can be effective for structuring a brief employment relationship.  That’s the one desirable outcome. 
The (Really) Bad News 
Often, however, limited term contracts are not utilized properly and this leads to the three undesirable outcomes. 
The first arises from employers’ tendency to rehire the same individuals year after year.  Although the employees go through an unpaid layoff (or other break in active service) each year, they come back again each year and there is no question that their employment will pick up where it left off. 
In this scenario, the employer often believes it has the protection of the “one year” limited-term contract of employment which it has the employees sign each year.  It thinks it can simply cut employees loose at the end of a season with no risk of liability. 
But what the employer often isn’t aware of is the tendency of courts to disregard the limited-term label after a few years (or seasons) of employment.  The courts relabel the relationship as “indefinite” in nature – raising the implied obligation on the employer’s part to provide reasonable notice of termination and, if it doesn’t do so, creating the likelihood of wrongful dismissal actions by terminated employees. 
The second undesirable outcome occurs when the employer retains the employee beyond the defined term but neglects to have a new contract signed in a timely and effective manner.   
This is a very common occurrence and I’ve seen many, many employers wake up (unhappily) to the fact that an employee whom they thought was employed on a limited-term basis really isn’t.  That’s because, if the employer retains the employee beyond the defined term, without a new contract being properly implemented, the courts will again treat the relationship as having become “indefinite” in nature. 

So, the use of limited-term contracts places the burden on the employer’s human resources staff to always be aware of when contracts were signed, when they are expiring, and to get new contracts properly implemented before the old ones expire.  Often, this burden goes unsatisfied. 

The third undesirable outcome arises if – as is often the case - the employer severs the relationship prior to the expiry of the term of the agreement.  It is critical to have an early termination formula built into the contract.  This is important because of the common law rules regarding early termination of a limited-term contract. 
The common law requires that, in the absence of an early termination formula, the severed employee is entitled to be paid out for the entire balance of the contract period.  It seems that employers usually don’t realize they’ve been caught by this rule (or that it even exists) until the relationship has been severed and it’s too late to avoid this potentially sizeable liability. 
A Real Life Example 
In a B.C. case, our Provincial Court emphasized the rule applying to early termination of limited-term contracts.  Frederic Ntibarimungu was a teacher employed by the Vancouver Career College commencing in 2006.  He was signed to a new contract in 2007 stating that his employment would expire in January of 2008. 
In the interim, however, the College claimed to have received complaints about his teaching style and to have concluded that he had a poor teaching attitude.  As a result, Frederic’s employment was terminated. 
The Court did not accept the College’s position that Frederic was terminated for reasons amounting at law to just cause for summary dismissal.  That left the Court with the task of assessing damages owing to Frederic as a result of the termination. 
The Court re-stated the “general principle in law … that wrongfully dismissed employees on fixed-term contracts are not entitled to reasonable notice but rather to the balance due under their fixed-term contract.”  The College was ordered to pay Frederic damages representing the wages he would have earned during the entire balance of the term of his agreement. 
I’d say that misuse of limited-term contracts definitely falls within the top 10 most common traps for inexperienced or unwary employers.   
My advice is, unless the employee is being hired in full expectation that the need of his/her services will end with the expiry of the first limited-term contract, use an indefinite term contract (always containing a valid and enforceable termination clause) instead. 



This item is provided for general information purposes only and is not intended to be relied upon as legal advice. Informed legal advice should always be obtained about your specific circumstances.

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