The Ontario Court of Appeal ordered an employer to pay about 3 years of compensation to a 23-month employee terminated without cause. A poorly drafted contract meant the employee was entitled to his full salary and benefits for the rest of his 5-year fixed term. In Howard v. Benson Group Inc 2016 ONCA 256, that came to over $200,000 in damages.
The facts
The employer, which runs an automotive service centre, hired the employee as a truck shop manager on a 5-year fixed-term contract at $60,000 a year plus benefits, and terminated him without cause 23 months in. He sued for breach of contract, seeking his compensation for the rest of the term.
The employer argued that the contract allowed early termination in exchange for the minimum severance allowed by statute. The motion judge held that the clause, which referred to severance "in accordance with the Employment Standards Act of Ontario", was too vague to enforce, and struck it from the contract. The judge awarded a reasonable notice period under the common law instead.
The employee appealed, arguing he was entitled to his lost earnings to the end of the contract, not the much lower common law notice amount, and that the common law duty to mitigate his damages shouldn't apply.
The decision
The Court of Appeal sided with the employee on both points.
Paid to the end of the contract. The general rule for fixed-term contracts is that, without a clause clearly limiting it, the employee is entitled to the compensation they would have earned to the end of the term. Because the early termination clause was unenforceable, the general rule applied. The Court rejected the argument that this was an unfair windfall: the employer was a sophisticated party that drafted the contract, and it was up to the employer to clearly contract out of the obligation. Where an employer fails to use "unequivocal, clear language, it cannot complain when it is held to the remaining terms of the contract".
No duty to mitigate. Normally a wrongfully dismissed employee must take reasonable steps to reduce their losses by finding another job. The Court held that this duty doesn't apply when a fixed-term contract is ended early. The employee wouldn't have received severance if the contract had run its course, so if it ends early, they are entitled to be paid for the full term, unless a specific clause says otherwise.
Lessons for employers
- Draft termination clauses carefully. Vague or ambiguous clauses are unenforceable. Usually that leaves the employer paying common law damages, but ending a fixed-term contract can cost even more.
- Courts will rebalance an ambiguous contract. Courts take the power imbalance in employment seriously, and an employer's poor drafting will be held against it.
- There is no duty to mitigate on fixed-term contracts unless the contract clearly requires it. Think twice before terminating a fixed-term employee without cause.