A $1.2-million lesson about the dangers of fixed-term contracts

Companies that sign a fixed-term contract covering a long period of time could be liable for significant damages if the employment relationship does not work out. A recent Ontario Court of Appeal ruling bears that out, with an employer ordered to pay damages totalling more than $1.2 million.

The respondent in McGuinty v. 1845035 Ontario Inc. was the third-generation owner of a funeral home. At age 55, he sold the business and signed a transitional consulting services agreement (TCSA) with the new owners, setting him up as the general manager for a 10-year period. The agreement included a vehicle and fuel allowance, plus commissions.

The one major thing the contract lacked was a provision dealing with early termination, which is at the crux of this case. Many employers and employees, when they enter into an agreement, are very focused (and rightly so) on the pay and assume that things will “work out.” Experience teaches that they do not always do.

How the relationship soured

Court documents state a “lack of trust” soon developed between the new owners and the general manager, and he was required to fill out timesheets to show he was working at the office. A written note followed, stating he was no longer allowed to use the company vehicle for his personal use.

During one weekend the general manager took personal furniture from the funeral home that he had stored there. Believing he was throwing away files without authorization, the owners changed the locks, leaving him without a key.

The next week the general manager went on a two-week medical leave, authorized by his family doctor. During that time, he sent the owners a note stating: “I wish to make clear I am on medical leave and am not stepping down from my position,” with his medical leave extended by the doctor “while work issues are resolved.”

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During this period the general manager claimed he met one of the owners at the funeral home, leading him to conclude “that he was no longer welcome,” though the owner denies the meeting took place.

To add insult to injury, while attending a cousin’s funeral at the funeral home, the general manager discovered that his desk had been moved to the basement and his photo – which had hung on the wall by the front desk along with pictures of his brother, father, and grandfather – had been removed.

He started legal proceedings, alleging constructive dismissal and damages for breach of the TCSA. He won at trial and the Court of Appeal agreed with the trial judge that the respondent had been constructively dismissed. Legally, a constructive dismissal is a termination without the letter from the employer where the employer says, “We are terminating your employment.” A constructive termination is like a termination but without such a letter.

The big takeaway: Big contract, big damages

Since there was no provision in the TCSA to address early termination, the appeal court endorsed the trial judge’s decision to follow an Ontario Court of Appeal ruling in Howard v. Benson Group Inc. Howard is the case a few years ago that ruled that, if an employer terminates an employee on a fixed term agreement, it must pay the employee as if they were still working for the employer for the duration of the agreement.

The court in McGuinty held that, when a fixed-term contract does not contain an enforceable termination provision, a discharged employee is “entitled to a contractual sum for the termination of his employment in an amount equal to his salary and benefits for the unexpired term of the Employment Contract.” In this case, that included $900,000 as salary for the nine years that remained on the general manager’s fixed-term contract, plus $108,000 for vehicle expenses, $90,000 in benefits, $9,000 for a golf membership, and $167,173.83 in commissions. Altogether, a staggering $1,274,173.83.

Since it is impossible to know how many people would die during the period of the respondent’s commission entitlement, the trial judge calculated his average monthly commission during an eleven-month period for which payroll records were available, multiplying that amount by the remaining 108 months of the contract.

‘A reasonable approach’

“In my view, this was a reasonable approach, one that follows the instruction set out by this court in Martin v. Goldfarb,” wrote Justice Grant Huscroftin the appeal court decision.

“The trial judge considered it appropriate to approximate the value of the respondent’s benefits, including medical, dental, life and disability coverage, at 10%, rather than the 15% of salary sought by the respondent,” he added. “This approach has been followed in several trial decisions.”

This case perfectly illustrates the danger of fixed-term contracts. Employers need to seek legal advice before offering them to new hires, and they might even be wise to review existing contracts to ensure the terms governing termination are clear.

In a manner of speaking, it may be their funeral if they don’t do that.