Fixed-term contracts and constructive dismissal

Employee awarded $1.3 million for nine years’ worth of compensation

Fixed-term contracts and constructive dismissal
Stuart Rudner

By Stuart Rudner and Nadia Zaman

 

Thinking of using fixed-term contracts? Well, you should think twice.

Many employers have been burned when they tried to terminate a fixed-term contract early and discovered the extensive severance obligations. And in one recent case, an employer constructively dismissed an employee in the first year of a 10-year deal and ended up having to pay out nine years’ worth of compensation - close to $1.3 million.

 

The case is McGuinty v 1845035 Ontario Inc (McGuinty Funeral Home). Grant McGuinty was a third-generation owner of the McGuinty Funeral Home when, in 2012, he agreed to sell his shares to 1845035 Ontario, controlled by Gary and Steven Eide. It was a term of the share purchase agreement that McGuinty would enter into a transitional consulting services agreement (TCSA) by which he would continue in the employ of the funeral home for 10 years.

Not long after the transfer of ownership, unhappy differences arose between McGuinty and the Eide brothers. Within 11 months, McGuinty had gone on medical leave due to workplace stress that he says was induced largely by the actions of Gary Eide.

McGuinty did not return to work and claimed to have been constructively dismissed. He sought damages for breach of the TCSA, intentional infliction of mental suffering and discrimination prohibited by the Ontario Human Rights Code.

Analysis

Justice Donald Gordon analyzed the breakdown of the relationship between the parties. He held that while both sides bore some responsibility, the employer had repudiated the contract, McGuinty had accepted that repudiation, and thus, he was constructively dismissed.

Specifically, the judge found that:

 

“Over a period of several months Gary [Eide] (1) improperly terminated [McGuinty’s] use of the company vehicle; (2) without notice to [McGuinty], recruited an employee who was subordinate to him to track his time at the funeral home; (3) did not pay [McGuinty] commissions to which he was rightfully entitled; (4) removed [McGuinty’s] photograph from the funeral home; and (5) without notice to [McGuinty] and, without seeking any explanation from him, changed the locks to the funeral home. I am satisfied that this amounted to a course of conduct which, i[n] light of all the circumstances, would lead a reasonable person in [McGuinty’s] position to conclude that the [employer] no longer intended to be bound by the terms of the TCSA.”

 

When it comes to fixed-term contracts, an employer is obligated to pay an employee what they would have earned up to the end of the contractual term, unless there is an enforceable termination clause. This obligation will not be subject to mitigation.

 

Here, there was no provision in the fixed-term contract regarding early termination of the agreement. As such, the judge held that McGuinty was entitled to all of the compensation and benefits he would have received had the contract been completed.

This proved to be very costly for the employer, because McGuinty had only worked for about one year of the 10-year term. As a result, the company was on the hook for the remaining nine years, which amounted to $1.3 million.

Takeaways

 

As Stuart Rudner has written about previously, fixed-term contracts may seem to be a strategic tool but using them inappropriately can be extremely costly.

 

Many employers use fixed-term contracts due to an ill-conceived idea that it will help them avoid severance costs. After all, you can just keep renewing one-year agreements and, if you choose not to renew, then you don’t have to pay severance, right?

Unfortunately, that is not the way the law works. If there is a legitimate reason to hire someone for a fixed term, such as a leave replacement or funding issues, then it makes sense to do so. However, if the reality is that renewals are a mere formality and that, for all intents and purposes, it is a contract of indefinite duration, courts will deem it to be one and the legal rights and obligations will be assessed on that basis.

 

Furthermore, the law of “reasonable notice” does not apply to fixed-term contracts, as we saw in McGuinty. Unless there is an enforceable early termination clause, the employer will have to pay the balance of the contract even if it terminates right near the start. That can be far more than reasonable notice would be at common law.

 

Before using fixed-term contracts, employers should speak with an employment lawyer to assess whether it is advisable and, if so, ensure that it is done properly. Otherwise, it can easily come back to haunt them.

 

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