It’s important for every employer to establish terms of employment with their employees. Most employees are hired indefinitely – which means there is no set date of when the employment will end.
Alternatively, some employees are hired for a set amount of time. This is referred to as a fixed-term contract.
Fixed-term contracts are a great way for employers to acquire talent over a busy period. However, employers should be wary of the pitfalls and potential legal consequences of fixed-term contracts, if improperly used.
In this guide, we’ll explain what a fixed-term contract is, the rules to follow when using one, as well as the benefits and risks they bring.
What is a Fixed Term Contract?
A fixed-term contract is a type of employment contract where the employer and employee agree that the employment will end on a set date.
Fixed-term contracts can be used for the following:
• When you need extra workers or specific skills for a project. • Hiring seasonal employees in retail during the holidays.
Fixed term contracts govern the employee’s terms of employment until the end of the term. Once it is over, the employment is automatically terminated. The employer and employee may renew the fixed term agreement or agree to a new indefinite term contract but are not obligated to do so.
Common Terms in a Fixed-Term Contract
All fixed term contracts should be in writing and signed by the employer and employee. Some terms that should be included in a fixed-term contract are:
- Job title and description.
- The reason for the fixed-term contract.
- The set end date (termination date).
- Benefits, sick leave, and vacation time.
Is There a Probation Period in a Fixed-Term Contract?
An employer and employee may agree to a probationary period or an early termination provision in a fixed-term contract. This will allow the employer to terminate the fixed-term contract early if the relationship with the employee breaks down.
You should be cautious when drafting such probationary or early termination provisions in a fixed-term contract. Some probationary or early termination provisions have been deemed unenforceable.
If you want to terminate a fixed-term contract early but don’t have probationary or termination provisions, you may be liable to pay the employee up to the end of the contract.
Can an Employee Terminate a Fixed-Term Contract?
You may agree to terminate a fixed-term contract, which includes allowing the employee to resign early from the fixed-term contract. However, if there’s no indication that an employee wants to resign from the fixed-term contract early, it may be more complex.
A contract may be terminated without the employee agreeing if there is an enforceable term in that allows the parties to end the contract early. Such provisions must be carefully drafted to avoid legal implications.
If an employee resigns from their fixed-term contract, you may have a claim against the employee for breach of contract. You may need to hire another employee to complete the designated work. If you can show foreseeable damages caused by the employee prematurely terminating the fixed-term contract, you could sue the employee.
Can an Employee Take Maternity Leave on a Fixed-Term Contract?
An employer must allow an employee to take maternity leave (also referred to as pregnancy leave) if they are on a fixed-term contract. Employees who are on fixed-term contracts have the same rights covered under employment standards legislation as employees on indefinite contracts, with some exceptions.
For the employee to be eligible for maternity leave, they must meet the requirements in their respective provincial or federal employment standards legislation. For example, employees in Alberta are eligible for maternity leave if they:
- Are working for an employer covered under the Employment Standards Code, and
- Have been employed for at least 90 consecutive days.
An employee must also give two weeks notice of maternity leave. If no notice is given, an employee may give the employer a medical certificate indicating they cannot work due to pregnancy or by giving the estimated delivery date.
If the fixed-term contract ends while the employee is on maternity leave and the contract is not renewed, the employee is not entitled to return to their job. However, if the employee’s maternity leave ends before the end of the fixed-term contract, they’re entitled to return to their employment.
Employers must not take into consideration an employee’s maternity leave when renewing a fixed-term contract. Terminating a fixed-term contract or refusing to renew the contract because an employee was on maternity leave may be a violation under human rights legislation.
What are the Fixed-Term Contract Benefits?
The main benefit of using fixed-term contracts is avoiding the requirement to provide employees with notice of termination.
In a fixed-term contract, the notice period is the date the contract ends. The employer is not required to provide notice of termination or pay in lieu. This is because the employee is already aware of the termination date of the fixed-term contract.
However, employers often forget that an employee was hired under a fixed-term contract and continue their employment well after the termination date. At that point, the fixed-term contract becomes an indefinite-term contract. Meaning the employee would be entitled to notice of termination or pay in lieu thereof.
When employers continuously renew fixed-term contracts, they become at risk of a court potentially determining that the employment is on an indefinite term. Employers may then be at risk of paying large sums of notice of termination damages and legal fees.
Tips for Employers Using Fixed-Term Contracts
Fixed-term contracts are an effective tool to limit obligations to provide notice of termination. However, employers should proceed with caution to avoid unintended liability.
Employers are strongly recommended to use the following tips:
- Use clear and unequivocal language in the contract.
- Clearly state that it will not automatically be renewed.
- Clearly state what happens in the event the employee’s employment is terminated prior to the end of the term.
- Clearly state that the employee will have a duty to mitigate in the event of early termination.
- Do not allow the employee to work past the end of the term unless actively engaging in the renewal of the contract.
Get Advice on Fixed-Term Contracts with BrightHR
Fixed-term contracts are a great way to hire temporary help without committing to employees on an indefinite basis. However, employers must be cautious and careful in drafting fixed-term contracts to avoid unintended liability such as large payouts.
Employers should keep track of all fixed-term contract employees and their respective termination dates to avoid them turning into indefinite-term employees.
If you need assistance with drafting fixed-term contracts, our BrightAdvice service allows you to receive quality advice on any employment issues you may have.
If you need assistance with record keeping and tracking your employees who are fixed-term contracts, our BrightAdvice service allows you to receive quality advice on any employment issues you may have.
Contact us on 1 888 220 4924 or book a demo today.
Have a question?
Ask away, we’ve got lightning fast answers for Canadian business owners and employers powered by qualified experts.