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Fixed-Term (Employment) Contract: The Danger of Early Termination
In Ontario employment law, fixed-term employment contracts can seem straightforward a defined start and end date with clear terms. However, when a fixed-term agreement ends prematurely, the legal and financial consequences can be far greater than employers anticipate.
The Ontario case McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), 2019 ONSC 4108, highlights just how costly an early termination of a fixed-term employment contract can be. Below, we unpack the case, its legal findings, and the lessons for employers and employees alike.
Case Background: McGuinty v. 1845035 Ontario Inc.
Mr. McGuinty owned and operated his family’s funeral home business in North Bay for decades. When he sold the business to the defendant company, he agreed to stay on as General Manager under a 10-year fixed-term employment contract.
The contract guaranteed him an annual salary of $100,000, plus commissions, benefits, and a company vehicle. However, less than a year into the agreement, the employment relationship deteriorated.
After experiencing significant workplace stress, Mr. McGuinty went on medical leave. The employer then took several actions that strained the relationship further, including revoking his company vehicle, changing the locks, and ceasing commission payments.
Believing these actions breached the terms of his contract, Mr. McGuinty filed a lawsuit for constructive dismissal in 2015.
The Lower Court: Constructive Dismissal and the Costly Consequence
The Ontario Superior Court found that the employer’s conduct amounted to constructive dismissal, as it fundamentally breached the terms of Mr. McGuinty’s contract and demonstrated an intention not to be bound by its terms.
Critically, the contract did not contain a termination or early cancellation clause. As a result, the Court awarded Mr. McGuinty the value of the remaining nine years on his fixed-term contract, including salary, commissions, benefits, and expenses, totaling $1,274,173.83.
The Court also confirmed that in the absence of a termination clause, the award was not subject to mitigation, meaning Mr. McGuinty was not required to seek alternative employment to reduce his damages.
As Christopher Achkar, employment lawyer and founder of Achkar Law, explains:
“A fixed-term contract may seem straightforward, but ending it early can expose both employers and employees to significant legal and financial consequences. Speaking to a lawyer before taking action can help you avoid costly mistakes.”
The Appeal: Court Upholds the Employee’s Victory
The employer appealed, arguing that Mr. McGuinty had condoned the company’s actions and thus could not claim constructive dismissal.
The Ontario Court of Appeal disagreed. It confirmed that condonation or the employee’s acceptance of an employer’s conduct must be proven by showing that the employee continued to work under the changed conditions or otherwise accepted them.
In this case, Mr. McGuinty’s medical leave and subsequent actions demonstrated the opposite. He had not accepted the changes and was therefore entitled to treat the employer’s conduct as a termination.
Legal Principles Clarified
The McGuinty decision reinforces two key points about constructive dismissal and fixed-term contracts in Ontario:
1. Constructive dismissal occurs when:
- The employer unilaterally changes an essential term of the contract, or
- The employer’s conduct shows an intention not to be bound by the agreement.
2. Condonation applies only where the employee continues to work or fails to object within a reasonable time. In this case, Mr. McGuinty’s personal circumstances, including his age, health, and non-compete obligations, explained his delay and supported the Court’s finding of constructive dismissal.
Key Takeaways for Employers
This case serves as a critical reminder for employers:
- Include clear termination and mitigation clauses in any fixed-term employment contract.
- Avoid making unilateral changes to key terms of employment, especially where there is no cancellation provision.
- Consult legal counsel before ending or altering a fixed-term contract, as doing so prematurely could expose the company to significant liability.
Without careful drafting and professional guidance, early termination of a fixed-term contract can result in substantial damages, even years of unearned salary.
How Achkar Law Can Help
Whether you are an employer seeking to manage contract risk or an employee who believes your fixed-term agreement was wrongfully terminated, our team at Achkar Law can help.
We provide strategic advice and representation in all areas of employment law, including constructive dismissal, contract drafting, and wrongful termination disputes.
The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Achkar Law Professional Corporation and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Achkar Law Professional Corporation. ©