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How to Handle Early Termination of a Fixed-Term Contract

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In October 2016, a Canadian court of appeals ruled in favor of John Howard. Howard worked as a truck shop manager and later as a sales development manager on a fixed-term contract of five years. After 23 months, he was dismissed without cause. He sued his employer for the cost of his salary and benefits for the remainder of his contract.

After the appeals court trial, he was awarded the full amount remaining on his fixed-term contract. His award totaled more than $200,000 in damages. A determining factor that led to his victory was the lack of specifications regarding the early termination of a fixed-term contract.

In Howard’s case, a lack of specific language within the employment contract left the employer liable for repercussions. Rather than explicitly stating the terms of an early termination, the employer wrote, “In accordance with the Employment Standards Act of Ontario,” which the court determined was too vague to be enforceable.

Howard’s case is not unique; many employers face similar issues when handling early termination of a fixed-term contract.

In this post, we provide some best practices for handling fixed-term employment contracts to help you avoid this costly scenario.

How to write a clause for early termination of a fixed-term contract

The best way to mitigate risks for early termination is to write a specific clause in the contract that outlines the conditions under which early termination is governed.

When working in multiple countries, it is important to ensure the language in a termination clause is exact.

Fixed-term contracts should explicitly state:

  • Reasons for which a contract may be terminated early
  • Required notice of early termination
  • Procedures the employer and employee must follow
  • Required remuneration to the employee upon early termination
  • References to the appropriate laws that govern such agreements

To avoid risks associated with poorly drafted contracts, have a lawyer familiarize themselves with local labor laws before reviewing or drafting a fixed-term contract.

In addition to mitigating legal risk, a well-drafted and clearly articulated early termination clause helps the employer and employee better understand their relationship.

Best practice for compliance

In general, fixed-term contracts should only be used when there is a specific reason for temporary employment. This includes projects with an end date, a seasonal position, or a replacement position for an employee on leave. Courts may determine that your fixed-term contract does not apply when you treat the employee like an indefinite-term employee.

Other tips for compliance in fixed-term contracts:

  • Avoid issuing a series of fixed-term contracts to one employee
  • Do not include renewal clauses
  • Provide equal protection to employees under fixed-term contracts as those with indefinite-term employment

International labor law and fixed-term contracts

Labor laws vary greatly between countries and so do their protections for fixed-term employees. Some countries provide employers and employees wide latitude on their fixed-term contracts while others are very rigid. For example:

  • French labor law has strict protections for employees, making it very difficult to dismiss employees. France prohibits early termination of a fixed-term contract without “force majeure.”
  • Early termination of fixed-term contracts is illegal in Japan. Japanese labor law provides heavy protections for employees and most companies provide financial incentives for employees to resign rather than dismiss them.
  • In Malta, both the employer and employee can terminate a fixed-term contract early, but there can be severe penalties. If the employer terminates the contract, he or she must pay the employee 50% of the wages for the remainder of the term. If the employee terminates the contract early, he or she owes the employer 50% of the wages for the rest of the term.

Fixed-term contracts provide many benefits to companies, but they can carry a heavy legal risk if they are not written correctly. With countries having a wide and varying array of legal protections, employers should carefully consider early termination clauses in fixed-term contracts.

Expand compliantly with an EOR

Compliance with the early termination of a fixed-term contract can be a challenge for any legal professional, especially during global expansion. Avoid the headaches and risks by partnering with an employer of record (EOR) instead.

An EOR partner ensures compliant employment contracts for your global talent and can have you operating in new markets quickly—without the need for entity establishment. Hire your dream team, expand your business overseas, and maintain compliance with international employment laws. Velocity Global has you covered.

Ready to take on the global marketplace? Contact Velocity Global to learn more.

Frequently asked questions

Can I terminate an employment contract early?

Yes. Ideally, employment contracts are terminated with mutual consent between employer and employee. Also, the fixed-term contract should include a clause to mitigate risk in the event of an early termination, particularly in an event where mutual consent is not present.

What happens when you end a contract early?

Early termination under a fixed-term contract, or the dissolution of the contract, may result in penalties stated within terms of the contract, commonly taking the form of a predetermined fine.

Can I get out of an employment contract?

Yes. If both parties mutually agree, it may be decided to terminate an employment contract without penalty. However, depending on the terms of the contract, employee penalties may apply.

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