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Smithson: Limited-term job contracts can be trap for employers
Now is the time of year when many employers are filling out their seasonal workforce.
The mistake of routinely hiring employees on “one year” contracts is a trap into which these employers routinely stumble.
If used properly, so-called limited-term contracts can be a useful and effective tool for structuring employment relationships.
In my experience, however, there are three common outcomes from the use of limited-term employment contracts and two of them are undesirable.
The purpose of a limited-term employment contract is to document a relationship which is truly time-limited.
The employer hires an employee for a particular period of time and when the contract expires the employee simply departs.
Upon the expiry of the term agreement and the cessation of the relationship, the employer has no obligation to provide working notice or any pay in lieu.
Correspondingly, the employee has no basis for severance-related claims against the employer.
This use of a limited-term contract is perfectly legitimate and, if properly utilized and administered, can be a very effective tool for documenting the relationship with the employee. That’s the desirable outcome.
Often, however, limited term contracts are not utilized properly and this leads to the two undesirable outcomes.
The first arises from employers’ tendency to hire the same individuals year after year.
Although the employees go through an unpaid layoff each year, between seasons, they regularly come back to work each spring and there is no question that their employment will pick up right where it left off.
In this scenario, the employer 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.
When that occurs, the relationship is relabeled as “indefinite” in nature—this raises the implied obligation on the employer’s part to provide reasonable notice of termination and, if it doesn’t do so, the likelihood of wrongful dismissal actions by terminated employees.
The second undesirable outcome arises if—as is often the case—the employer decides to sever 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 sizeable liability.
In a recent case, the B.C. 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 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 balance of the term of his agreement. I’d say that misuse of limited-term contracts definitely falls within the top ten mistakes made by inexperienced employers and human resources staff.
Avoiding this trap simply requires some basic knowledge of how the courts view employer’s use of limited-term contracts.