Avoiding Wrongful Dismissal Litigation: One Employment Contract at a Time

Many wrongful dismissal cases are determined by the sensibilities of the judge who is appointed to the case. Some are employee friendly. Others are employer friendly.

Consider the opening sentence of a wrongful dismissal case that was decided earlier this month: “Employment law is governed by the notion that the employer should not be able to use its larger power to unfairly gain an advantage over the employee.” I didn’t need to read any further to know who won this case…

The Case of An Employer Trying to Avoid Termination Pay By Requiring An Employee to Enter into a Series of One-Year Fixed Term Contracts

 I strongly oppose the use of fixed term contracts. A contract of indefinite employment with a well-drafted termination clause can usually achieve the same end. It also avoids you the time, cost, disruption and uncertainty associated with litigation.

Here’s what can happen if an organization uses a fixed-term contract:

In Michela v. St. Thomas of Villanova Catholic School, three teachers signed a series of one-year contracts; two of them signed 12 one-year contracts, and the other signed 8 one-year contracts. They were all notified that the last contract would not be renewed when it expired on August 31, 2013. These types of contracts are common in private schools.

The teachers claimed the last contract was not a fixed term contract and were therefore entitled to “reasonable” notice of termination. The school claimed the teachers had signed a one-year fixed term contract that ended on August 31, 2013 and were not entitled to any further notice of termination. The judge looked at the entire agreement and the surrounding circumstances and concluded the last contract was not a one year fixed-term contract. She stated:

“The term (of the 2012-2013 contract) is for one year, but the contract contemplates that it may operate for either a longer or shorter period… (A term in the 2000-2001, 2001-2002, 2002-2003, 2003-2004, 2004-2005 contracts) required the teacher to decline a renewal in writing 30 days before the end of the current contract…. For the first three school years referred to, these contracts also included a term that says that the Agreement would automatically expire on September 1^st of the applicable year (i.e. 2000-2001 2001-2002 and 2002-2003) …For the fourth and fifth years, the clause was amended by adding additional direction: The teacher will be notified in writing by April 15^th [of the applicable year] if the School does not intend to offer the teacher a full time position for the [subsequent] school year (i.e. 2003-2004 and 2004-2005)”.

 “…For the first three years, which is it? Does the contract expire or, absent a notice declining renewal, was the contract renewed? For the fourth and fifth years, the position depends on a double default. Absent a notice that the School did not intend to offer the teacher a position for the upcoming year or a notice from the teacher declining a renewal, the teacher would continue for another year. Either way, there is ambiguity.

 Lessons to be Learned

 1. Judges are unpredictable. We generally have excellent judges in Ontario who do their best to apply the law fairly. Each judge however has a unique personal, educational and professional background. I believe this background influences how they mete out justice. Two judges hearing the same facts could come to different conclusions. This is one of the reasons why lawyers try to settle cases early in the litigation process; to avoid this litigation risk.

2. Fixed-term contracts can be very costly. In this case, each of the three employees was awarded six months compensation in lieu of notice, and the employer was ordered to pay $ 42 000 in legal costs. The employer was also, of course, required to pay it’s own legal costs. In this case, the school could ill afford these costs. In this regard, the school terminated the three employees (and 2 others) because it believed it was likely facing a $300,000 shortfall in revenue for the 2013-2014 school year.

3. Employment contracts save termination costs. Under a series of one year fixed-term contracts, a teacher with 25 years service earning $ 100 000 a year could be entitled to receive as much as 24 months notice of termination (or up to $ 200 000 pay in lieu of the notice) whereas a school who uses a well-drafted employment contract can reduce this notice period to 8 weeks (or about $ 15 000 in lieu of notice).

For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers and employees on all aspects of the employment relationship including employment contracts. If you have any questions, you can contact him at 416 317-9894 or at [email protected]