Fixed-Term Contract Costs Employer $1.2 Million In Severance

Beware the fixed-term employment contact. That should be every employer's mantra following the recent decision of the Ontario Superior Court in McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), 2019 ONSC 4108 ("McGuinty").

The McGuinty case has its roots in the sale of a third-generation family-owned business. Specifically, the Plaintiff in McGuinty had for many years owned and successfully operated a funeral home in North Bay along with his brother. After his brother fell ill, the Plaintiff elected to sell the funeral home to a new owner. As part of that transaction, the Plaintiff moved from owner to employee. He further entered into a ten (10) year fixed-term "Transitional Consulting Services Agreement" with the Defendant-purchaser, wherein he was recognized as a "key employee" of the funeral home going forward. The Plaintiff was paid an annual salary of $100,000.00 and provided a variety of other benefits.

Fixed-term employment agreements, like that entered into by the Plaintiff in the McGuinty case, are quite common following a sale of business. Purchasers often have an interest in seeing key staff members be retained for a set period post-sale to ensure their new business succeeds. Likewise, former owners-turned-employees and other vital workers who are to be transferred to the control of a purchasing party are often interested in security of tenure post-transaction.

Constructive dismissal from employment

Following the sale of the funeral home, the Plaintiff in McGuinty saw a deterioration of his working relationship with the Defendant-purchaser. Eventually, the Plaintiff commenced a medical leave as a result of workplace stress and thereafter, began a legal action seeking severance on the basis of an alleged constructive dismissal of his employment.

The resultant legal case was hard fought. To win, the Plaintiff had to prove that the Defendant-purchaser had unilaterally changed his terms of employment in a fundamental fashion.

The case ultimately came before Justice Gordon of the Superior Court. In reviewing the breakdown of the relationship between the parties, Just Gordon concluded both sides bore some responsibility. However, Justice Gordon went on to conclude that the Defendant-purchaser had indeed constructively dismissed the Plaintiff by taking the following actions:

[O]ver a period of several months [the Defendant-purchaser]: (1) Improperly terminated Grant's [the Plaintiff] use of the company vehicle; (2) Without notice to the Grant, recruited an employee who was subordinate to him to track his time at the funeral home; (3) Did not pay Grant commissions to which he was rightfully entitled; (4) Removed Grant's photograph from the Funeral Home; and (5) Without notice to the Grant and without seeking any explanation from him, changed the locks to the funeral home.

Assessment of Damages

For the Defendant-purchaser in McGuinty, the Court's finding of constructive dismissal proved costly. As there was no provision in the fixed-term contract to address early termination of the agreement, Justice Gordon ordered that the Plaintiff was entitled to the value of the remaining balance of the contractual term. Given that the Plaintiff had only worked for about one year out of the 10-year term, the result was an order for damages over a staggering 9-year period. That had a monetary value of $1,274,173.83!

Lessons Learned

While the outcome of the McGuinty case was painful for the Defendant-purchaser, had different steps been taken during the original sale of business, such a disaster likely could have been averted. Accordingly, employers in Ontario would be well served to keep the following tips in mind when next considering the use of fixed-term contracts in the workplace:

  1. In most situations, a contract of indefinite employment will work just as well (if not better) than a fixed-term contract. Indefinite agreements typically come with less risk, as there is no possibility that severance can be ordered to the end of the applicable term in situations of a wrongful or constructive dismissal.
  2. When using a fixed-term contract, consider including an early termination clause. Had such a clause existed in the McGuinty case, it may have reduced the Court's severance order by a magnitude of several hundred thousand of dollars.
  3. Consider keeping terms short for any fixed-term contract. Even if no early termination clause is utilized, the shorter the term of the agreement, the less expensive it will be to cover damages until the end of the term period.
  4. If the issue of security of tenure for employees arises in the course of negotiating a sale of business, keep in mind that long fixed-term contracts are not the only means available to address the situation. Instead, indefinite or short fixed-term contracts can be used and merely incorporate more generous termination provisions. Such clauses thus provide the respective employees with a 'golden parachute' to cushion their landing in the advent of an unanticipated future dismissal.

Note: This a reprint of an article by Andrew N. Vey of Vey Willetts LLP.