Choosing between a fixed-term and an indefinite-term employment contract is a critical decision for employers. Both types of contracts have specific legal and financial implications that affect business flexibility, workforce stability, and compliance with employment laws. Misusing or misunderstanding these agreements can expose businesses to costly liabilities. In this article, we’ll break down the key differences, benefits, and risks of fixed-term contracts and indefinite-term contracts, helping employers make informed decisions.
Unlike indefinite-term employment agreements, where employers are only required to provide notice or pay instead of notice upon termination, fixed-term contracts present a unique risk if it fails to contain an enforceable termination provision. If an employer terminates a fixed-term contract before the specified end date and there is no enforceable termination clause, courts typically require the employer to compensate the employee for the remaining balance of the contract term. This could mean paying out months—or even years—of wages, creating significant financial burdens for businesses.
What Is an Indefinite-Term Employment Contract?
An indefinite-term employment contract is the most common form of employment agreement. It has no predetermined end date and continues until either the employer or the employee decides to terminate the relationship, subject to applicable termination notice requirements.
Key Features of Indefinite-Term Contracts:
The employment relationship continues indefinitely until termination.
Employees are entitled to notice or severance pay upon termination.
Employers must comply with employment standards legislation regarding notice periods.
Employees may receive benefits such as vacation pay, bonuses, and retirement contributions.
Commonly used for permanent, ongoing positions.
Pros of Indefinite-Term Contracts:
Greater job stability for employees, leading to increased retention.
Simplifies compliance with labor laws and statutory entitlements.
Provides long-term workforce planning benefits for employers.
What Is a Fixed-Term Employment Contract?
A fixed-term contract is a type of employment agreement that sets a specific duration for the employment relationship. It automatically ends on a predetermined date or upon the completion of a specified task.
Key Features of Fixed-Term Contracts:
Employment ends at a specific date without requiring notice or severance.
Used for temporary, seasonal, or project-based work.
May be renewed, but frequent renewals can result in reclassification as indefinite employment.
Requires a clear termination provision to protect against liability.
Pros of Fixed-Term Contracts:
Provides flexibility for short-term staffing needs.
No obligation to provide severance or termination notice upon contract expiration.
Suitable for businesses with fluctuating workforce demands.
Legal Risks of Fixed-Term Contracts
Many employers assume that fixed-term agreements reduce termination liability, but improper use can lead to significant legal risks. Courts in Canada often rule against employers who use successive fixed-term contracts, and will instead find that an employment relationship is infinite at law. If a contract is terminated early and lacks an enforceable termination clause, the employer may be liable for all wages owed for the remainder of the term of the contract.
Example Case:
A company hires Sally on a one-year fixed-term contract but terminates the contract after four months. If the termination clause is unenforceable, the company will be required to pay the remaining eight months' salary.
To mitigate risks, employers should:
Avoid repeated renewals of fixed-term contracts.
Ensure their termination clause is enforceable
Use fixed-term contracts only when there is a genuine temporary need.
Best Practices for Employers
To ensure compliance and reduce risks, employers should:
Clearly Define Employment Terms – Specify contract duration, renewal conditions, and termination clauses in employment agreements.
Review Contracts Regularly – Employment laws change, so contracts should be updated to remain compliant.
Use Fixed-Term Contracts Sparingly – Only use them when there is a legitimate, short-term need.
Ensure Proper Termination Clauses – Include enforceable termination provisions to avoid paying out the remainder of a contract if ended early.
Consult the HireEase HR Essential Guidebook for more guidance on fixed-term employment contracts and indefinite term employment contracts.
For more information on HR best practices, download the HireEase HR Essentials Guidebook today.
For up-to-date lawyer-drafted employment contract templates, visit https://www.hireease.ca/.
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