Beware the Fixed-Term Employment Contract
A fixed-term employment contract may make a lot of sense in some situations where the nature of an employment relationship is temporary; for example, where an employee is being hired for project-based work, seasonal work, or maternity leave coverage.
The benefit of using a fixed-term contract in one of these scenarios is that the employer doesn’t need to give the employee reasonable notice to end the contract—the contract simply expires at the end of the term. Simple. At least in theory.
In reality, there are a number of pitfalls when it comes to fixed-term employment contracts.
Renewal After Expiry
Fixed-term contracts become tricky if they are used for an ongoing position, either where it is expected that the employee would continue working for the company after the expiry of his contract or where the position started as a temporary one but the parties decided to continue the relationship after the expiry of the contract.
If an employee is kept on beyond the term set out in their contract, whether by continuously renewing the fixed-term contract or by continuing work without signing a new contract, this creates ambiguity as to whether the employment relationship was intended to be for a fixed term or an indefinite term. In a situation like this, a court may very well find that although the employment contract referenced a fixed term, the reality was that the employment relationship was intended to be ongoing, which would mean the contract could only be terminated with reasonable notice despite the presence of an expiry date.
Dismissal During the Fixed Term
With a fixed-term employment contract, if you terminate the employee prior to the end of the term, by default, the employee would be entitled to be paid out for the entire balance of the contract period.
This can be addressed by including a termination provision in the contract allowing you to terminate the agreement prior to the end of the term. But in effect, that is not much different than having an indefinite term with the usual termination provisions, which also avoids the risk of being held liable for an entire fixed term. It is worth considering whether there is enough additional value in having a fixed expiry date to outweigh this risk.
Termination by the Employee
The only advantage left, then, is the perceived value of a fixed term contract obligating an employee to remain employed for the term. However, except in extremely limited circumstances, an employer cannot force an employee to continue to work, despite the employee agreeing to a fixed term. Unlike an employer (who would need to pay out the remainder of the contract in the event of early termination), there isn't very much in the way of damages assessed against an employee who leaves early. You may be able to show that you suffered a loss due to the employee's decision to make an early departure, but that loss would likely be minimal. You have a duty to mitigate your damages, so your loss would be limited to the time it took you to find a replacement. Even then, you would need to translate that time into lost revenue or other monetary damages, which may prove difficult.
Although a fixed-term employment contract may seem appealing, it should only be used in limited circumstances and only when there is a good reason (beyond simply wanting to avoid notice or severance obligations). Where a fixed-term contract is appropriate, make sure you understand the associated risks and take the necessary steps to minimize those risks. Lastly, make sure the fixed-term contract is drafted carefully with the right protections built in for your business.