Risks of Fixed-Term Contracts and Independent Contractor Agreements

In Covenoho v Pendylum Ltd., the Court of Appeal for Ontario quashed a lower court decision upholding the without cause termination of an employee under a fixed-term contract, and awarded her damages for the remainder of the term.

The employer, Pendylum Ltd., entered into a contract with the employee which stated that she was to provide consulting services to its customers as a Time and Attendance Implementation Consultant. The contract was for a one-year term. The termination clause in the agreement provided as follows:

2.1 The term of this Agreement will commence on the date of this Agreement and will continue in full force and effect unless the Agreement is terminated as follows:

(a) immediately by PENDYLUM providing written notice to you if you violate or fail to honor any of these provisions of this Agreement or fail to perform your duties as set out in Appendix A in a satisfactory manner as determined by PENDYLUM (known as Cause); or if the PENDYLUM Client to which you have been contracted terminate[s] its contract with PENDYLUM for your services; OR

(b) by either party providing written notice of at least two (2) weeks to the other.

2.2 In the event of termination, we will have no liability to you, save and except to pay any accrued and earned compensation up to and including the date of termination.

2.3 Upon termination or expiration of the agreement, you agree to return and/or destroy all confidential information and copies and sign an undertaking that all Confidential Information has been returned and/or destroyed.

After less than three months, Pendylum Ltd. terminated the agreement with the employee with immediate effect under clause 2.1 (a) as a result of a client’s decision to terminate its contract with the employer for her services.

At first, the employee filed a claim under the Employment Standards Act, 2000 (ESA) for overtime pay, vacation pay and public holiday pay. The Employment Standards Officer (ESO) found that the employee was an employee of Pendylum Ltd. and not an independent contractor because she worked at the employer’s premises, she used the employer’s equipment, she had little opportunity to make a profit beyond the assigned duties, and she had little risk of incurring significant financial losses in the course of performing her duties.

The employee then filed an action against Pendylum Ltd. for the balance of her fixed-term contract. The motion judge determined that the issue of whether the employee was an employee of Pendylum Ltd. would not be re-litigated in the action and relied on the ESO’s decision in this respect.

The lower court judge determined that the language contained in article 2.1 was clear and unequivocal, and that effect should be given to the reasonable expectations of the parties reflected by the words they have agreed upon.

The employee appealed the decision. The Court of Appeal for Ontario determined that the termination provisions contained in Articles 2.1(a) and 2.2 of the contract were contrary to the ESA in that they purported to allow the employer to terminate, without cause, the employee, in the event that she had been continuously employed for more than three months, by providing less than the statutory minimum notice period.

In determining whether the contract was in compliance with the ESA, the terms had to be construed as if the employee had continued to be employed beyond three months; if a provision’s application potentially violated the ESA at any date after hiring, it was void. As such, the termination provisions were void and common law standards applied.

As her employment was not validly terminated, the employee was entitled to damages equivalent to her salary for the remainder of the unexpired term of the contract, without deduction for mitigation.

For employers contracting with consultants or other types of private contractors, this decision is a reminder that a contract does not suffice to protect employers from employment relationship liabilities. Further, the Court of Appeal clarified that a termination clause that could potentially contract out of the ESA (i.e. in the future) will be null and void.

Employers can limit their risks upon termination of a fixed-term contract by including a termination clause in the contract which allows for early termination of the contract.