Fixed term contracts are intuitively appealing. If a business has funding for a three-year project, hiring someone to do that work on a three-year term seems logical.
Yet, as the recent Court of Appeal decision in Monterosso v. Metro Freightliner Hamilton Inc. (Monterosso),[1] underscores, hiring someone on a fixed term contract can carry significant risk.
The underlying facts of this case are straightforward. Metro Freightliner Hamilton Inc. engaged Monterosso as an independent contractor on a 72-month fixed term. Nine months into the six-year contract, the company terminated Monterosso’s services without cause. Monterrosso successfully sued for payment of the remaining 65 months of the contract, which amounted to CA$552,500 plus HST.
The Court of Appeal rejected Metro Freightliner’sargument that their fixed term contract had been amended (through an exchange of emails) and that this amendment allowed the company to terminate the six-year contract early, without the obligation to pay to the end of term.
In many respects this decision is similar to that of Howard v. Benson Group Inc. (Howard )[2] where an employee, who was hired on a five-year term contract and then terminated after 23 months of service, was awarded compensation for the unexpired portion of the contract. In both cases the cost of having to pay the worker to the end of the fixed term contract was significantly greater than what which would have likely been owed if the person had been hired on an indeterminate contract.
Where Monterosso and Howard differ is how the courts treat the duty to mitigate, depending on whether the contract is an employment contract or an independent contractor agreement. The Court of Appeal in Howard held that “a fixed term contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation.” In contrast, the Court of Appeal in Monterosso held that, unlike employees hired on fixed term contracts, an independent contractor has a duty to mitigate their losses. In other words, if the independent contractor in Monterosso had found other work during the balance of the term contract, then Metro Freightliner could have deducted those earnings from the 65 months that they were otherwise required to pay. Regrettably, for the appellants in this case, while they successfully argued that independent contractors have a duty to mitigate, the win was a pyrrhic one because they were unable to show that Monterosso had failed to meet his duty to mitigate. The obligation to pay him for the balance of the term remained.
Takeaways for employers:
- Before hiring someone on a fixed term contract, consider alternative options (i.e., an indeterminate contract).
- If, nevertheless, hiring on a fixed term, a carefully worded early termination and mitigation clause should be included in the agreement.
- If amending a fixed term contract (or any contract), do so unambiguously, with consideration.
- If terminating a fixed term of an independent contract prior to the end of the term, consider tracking and sharing other job opportunities with the former contractor in order to assist them in mitigating their losses.
For more information on this topic, please contact the author, Colleen Hoey.
[1] 2023 ONCA 413
[2] 2016 ONCA 256
