There are many reasons why a working contract ends. In order to make staff leaving your company as stress-free as possible, it's vital you understand the different ways you can terminate a contract.
Failure to do so can lead to legal claims, as well as cause unnecessary upset for the employee.
In this guide, we'll look at the different ways a contract can be terminated, how to make the process as smooth as possible, and the potential ramifications if done incorrectly.
What is an End of Contract?
In most cases, the end of the contract is the moment when the obligations between the two contracting parties end.
There are many ways in which an employment contract between employee and employer can end. It's important you understand all of them when it comes to terminating a contract.
Different Types of Contract End
As an employer, you need to understand when a contract can be terminated - and for what reason. Understanding these will help you avoid conflict in the future when you need to let an employee go.
Contract Termination by Prior Agreement
A termination by prior agreement is when both parties agree to have a written agreement in the employment contract that calls for termination for a specific reason.
This agreement must include the steps which should be taken for one of the parties to terminate employment. For example, providing written notice.
If you take up this option with one of your employees, you must ensure both parties sign the agreement before employment starts.
Fixed Term Contract Expires
Fixed-term contracts are commonly used in industries where seasonal employment is required and you can hire workers for a limited time.
Fixed-term contracts are also used to cover employees who are absent due to extended sickness or parental leave.
They're useful for employers as they eliminate dismissing an employee and having to provide expenses.
The ending of a fixed-term contract usually occurs when the agreement and date have been reached.
However, if circumstances change and you're happy with the employee, you can choose to hire them on an indefinite basis.
Impossibility of Performance
Termination for the impossibility of performance occurs when one party is unable to fulfil the duties and obligations of the contract.
Be aware that it must be impossible for anyone else in your business to perform the employee’s duties. If someone else in the company can, there's no impossibility. This is also known as an objective impossibility.
The contract of an employee can also end due to the employee’s resignation. Employees resign from a job for several reasons. Such as:
- Job unhappiness.
- They've found new employment and an increase in salary.
- Lack of trust in senior staff.
- Health reasons.
As an employer, you need to ensure you don't force your staff to resign from their job. If you make changes to the business which can lead to employee unhappiness, this may be constructive dismissal.
This may lead to your former employee taking legal action against you - which can have a negative effect on your company.
Contract Termination With Cause
Contract termination for just cause is when an employer terminates an employee's contract due to the employee committing an act, or acts, of wilful misconduct. Such as:
- Workplace violence.
- Sexual harassment.
- Workplace bullying.
- Conflict of interest.
- Culpable absenteeism.
- Highly disrespectful/inappropriate behaviour.
Contract Termination for Convenience
A termination for convenience allows one or both parties to terminate the contract without cause and without the risk of penalty.
Including a termination for convenience clause in your employment contract minimizes the risk when ending the contract. This type of clause has become more common in the construction industry.
A termination for convenience clause is a good way for employers to avoid potential financial damages caused by events outside the contracting parties' control. Ensure this clause is a signed part of all your agreements before employment starts.
Many employers choose to include a termination clause in their employment contracts, it's important you understand the reasons for a clause before including them in your business.
What's a Termination Clause?
Most contracts contain a termination clause which clearly defines an employee's right to the termination notice.
They go a long way to making terminating a contract easier for both employer and employee.
Why is a Termination Clause Important in your Employment Contracts?
Having a termination clause as part of an employment contract helps both parties if employment is terminated, and makes the process smoother.
There's less confusion as ultimately, both employer and employee understand what's expected of them if either party wants to terminate the contract.
As an employer, you need to be aware of the rules you must follow when you want to terminate a contract. Not terminating employment correctly could amount to wrongful dismissal by aw and potentially result in legal claims.
What Constitutes Wrongful Dismissal?
As an employer, you need to be aware of what could potentially be a wrongful dismissal. You must avoid doing the following:
- When you terminate the contract of an employee without providing the minimum statutory notice of termination or pay in lieu thereof.
- If you have made significant changes to an employee's job without their consent - which could result in constructive dismissal.
Can a Contract be Broken?
A contract can be broken if one party does the following:
- Doesn't stick to the terms of the employment agreement.
- Preventing the other party from fulfilling a contractual obligation.
If one party fails to fulfil certain obligations detailed in the contract, this can lead to breach of contract.
Different Types of Breach of Contract
You need to be aware of the different ways a contract can be breached. A breach of contract is when one party doesn't follow the terms or fails to fulfil their obligations of the contract.
Intentionally breaching a contract is a violation of employment law, and the non-breaching party could pursue a claim for damages.
A material breach of contract occurs when the breach (or failure to perform the contract) is so severe that it strikes the heart of the contract and makes it broken beyond repair.
An example of a material breach can include a failure to execute an obligation - such as paying wages to an employee.
The injured party may pursue monetary damages against the other party related to the breach, as well as cancel the agreement.
An immaterial contract breach (also known as a partial breach or minor breach) - is often not intentional, but nonetheless is against the terms of the contract.
An example of this breach is an employee clocking off a few hours before their shift finishes due to confusion.
How to Prove a Contract Breach
If you're looking to raise a contract breach claim against the other party (such as your employee), you need to make sure the contract has been broken.
Look at past events during the employment, such as lateness, unauthorized absences, and misconduct.
Make sure you understand the contract, ensure it's bound in a legal manner and the other party has broken its terms. You can also include a remedies clause within the employment contract.
What's a Remedies Clause?
A remedies clause in a contract lays out how any contract breaches will be dealt with after they happen. This will make it easier for you as a business to handle any breaches of contract which may occur following a termination.
Consequences of a Breach of Contract
The outcome of a broken contract is decided by an employment court or tribunal. Both employer and employee can take the other party to court.
The court will decide the legal outcome of the case following a claim. Some of the consequences can include:
- Financial damages: The court can award the claimant with a financial award following the legal claim. This is often used to place the claimant in the same position financially as if the contract weren’t broken.
- Equitable remedies: An example of this is the cancellation of a contract between an employee and the company. This option is taken if financial damages are seen as inadequate.
- Injunctive relief: A court order granting immediate relief by requiring a party to do, or retain from doing, a specific act pending the outcome of the proceedings.
End of Contract Notice
If you are looking to terminate someone's employment without cause, you have a legal requirement to provide the correct amount of notice.
The amount differs across Canada, make sure you understand the provincial rules for where you're based:
- If worked for less than one year but more than three months: one week.
- If worked for one year but less than three years: two weeeks.
- If worked for three to eight years: one week for every year.
- If worked for eight years or more: eight weeks' notice.
- If worked for three months or less: none.
- If worked for more than three months but less than a year: one week.
- If worked for more than a year but less than three years: two weeks.
- If employed for more than three years: three weeks, plus seven days/pay after each additional year of employment (to a maximum of eight weeks).
- If worked for more than 90 days but less than two years: one week.
- If worked for two years but less than four years: two weeks.
- If worked for four years but less than six years: four weeks.
- If worked for six years but less than eight years: five weeks.
- If worked for eight years but less than ten years: six weeks.
- If worked for ten years or more: six weeks.
- If worked for more than 30 days but less than a year: one week.
- If worked for at least one year but less than three years: two weeks.
- If worked for three years but less than five years: five weeks.
- If worked for five years but less than ten years: six weeks.
- At least ten years: eight weeks.
- If worked for more than 13 consecutive weeks, but less than one year: one week.
- If worked for more than one year, but less than three years: two weeks.
- If worked for more than three years but less than five years: four weeks.
- If worked for more than five years but less than ten years: six weeks.
- If worked for more than ten years: eight weeks.
Get Advice on End of Contracts with BrightHR
It's important you understand the law surrounding ending an employee's contract, and how to ensure their contract is terminated legally.
As an employer, you have an obligation to deal with terminations properly and provide your employees with the notice period they’re entitled to.
If you need advice on ending contracts, BrightHR has a handy tool that will help if required.
Our BrightAdvice service allows you to receive expert employment law advice whenever required.