October 13, 2004

Cons. of not renewing an employment contract for long time contract employee

Question: We currently have an employment agreement with an employee who has done work for our firm for many years. Every year, we sign a new contract for the upcoming year. The period of her contract is ending soon, and I do not want to renew her contract, although she has done nothing to breach her contract. As an employer, are there any consequences to not renewing her contract?"

Answer: The answer to this question lies in both the text of the employment agreement and the conduct of the employer during the employment relationship, particularly during past points where the employee’s contract has been renewed.

For some employers there are good reasons to have fixed-term employment arrangements. If an employer does not want to maintain an employment relationship with an employee after the expiration of the fixed term, there are no obligations under either the common law or the Ontario Employment Standards Act, 2000, so long as the fixed term is for a period of less than one year. With this in mind some employers attempt to hide a truly ongoing relationship with an employee in a series of one year fixed-term contracts that are very similar in nature. The perceived benefit to the employer is it can maintain what in many ways appears to be an ongoing relationship with a particular employee while taking on limited economic responsibility if it chooses not to renew the employee’s fixed-term contract.

The Ontario Court of Appeal recently discussed this issue. The court looked at a long-term relationship between a non-profit athletic association and its administrative director. During the 15 years in which the administrative director worked for the gymnastics association, she was hired under a series of one-year contracts. The contracts were very similar to each other but also contained ambiguous language as to whether the contract had the option of being extended or not. The court noted some of the language of the contract could be construed as implying a right of renewal and that at many times the renewal process appeared to be relatively automatic. However, after 15 years of service, the athletic association gave notice it would not be renewing the administrative director’s contract and would not calculate notice based on a senior employee of 15 years.

The relevant question for the court was should the employee be entitled to reasonable notice based on the shorter fixed-term of the contract or on the longer period of cumulative employment with the firm over the course of the consecutive fixed-term contracts? As in many other employment situations, the court was more interested in the reality of the employment situations as opposed to the formality of the employment contract. In all relevant respects, the court found this to be a situation of sustained and long-term employment. According to the court there was continuous service by the employee, coupled with ambiguous terms in the contract and conduct by the employer which indicated it perceived the conduct as being more than a one-year fixed term contract.

The court was very clear that an employer should not try and veil an ongoing employment relationship with consecutive fixed-term contracts where renewal provisions are, or could reasonably be considered to be, automatic and where the employer acts in a manner which implies that even it deems the employee to work under a contract of continuous service.

Thus if an employer has employees who are employed via a series of consecutive, fixed-term contracts which are subject to periodic renewal, there is no guarantee a court will not consider those employment relationships to be of continuous duration rather than simply for the fixed term. Furthermore, if the contract is for a fixed term which exceeds one year, the employment relationship will also be considered a continuous relationship and therefore an employer must ensure the contract complies with employment standards minimums with respect to notice on termination of employment.

When dealing with employees who may have fixed-term contracts renewed, the employer is well advised to take the following steps:

  • All fixed term agreements should be for a term which does not exceed one year.

  • The employer should review all employment agreements to ensure all contractual provisions discussing termination rights and renewal rights are clear and explicit and do not give the employee the impression of automatic renewal. The court noted that any equivocation or ambiguity within the contract will be interpreted strictly against the employer’s interest.

  • During the course of the employment agreement, ensure no representations are made to the employee that the contract will be automatically renewed.

  • Institute a formal review process for each fixed-term employee before any contracts are renewed, so no employee could reasonably assume that the renewal was guaranteed.

Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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