Length of Employment Contracts

Last month, I wrote about the financial importance of having an employment contract.  This month, I am going to address one important part of that contract: the length of the contract.

Often, I see contracts that say they are for a fixed period of time, often one year.  Then there is language dealing with the potential for “renewing” or “extending” the contract.  Sometimes, we see people who have been employed by a succession of one-year contracts. (I am referring to contracts in the non-union context.)

Maybe I’m missing something, but I see no benefit in “renewing” or otherwise having to re-do an employee’s contract on a regular basis.  Do you have a lot of free time to kill going through the renewal process for everyone’s contract every year?  Do you have a friend with HR skills who needs a job and you are making so much money that you can create unnecessary work to keep her employed?

Of course, those are stupid questions.  So why are employers doing it?
Why not have one contract that says that the person is hired on an indefinite basis?  That contract would also have a part setting out how the contract can be terminated.  Then, you eliminate the duplication and waste of: “temporary” and “permanent” contracts, “probationary” contracts, and the time spent revising and renewing the contracts each year. 

You also eliminate the risk of failing to have the contract “renewed” before it expires and the misplaced angst of employees who get upset because they are “working without a contract”.  

(There is one exception.  If you KNOW that the period of employment will be less than one year, that is a good reason to have a contract for a fixed term.)

I am often quite aggressively challenged on this point, most often by employers who rely on external funding.  They say that they don’t know, one year to the next, whether there will be funds to “extend” the contract of employment.  It doesn’t matter.  If the person has been employed more than 12 months, they are entitled to notice under the Employment Standards Act.  Further, the fact that you don’t “extend” or “renew” the contract does not mean that there is no obligation to the employee when you don’t extend. 

There was a case of a person who was employed for 15 years, with 15 successive one-year contracts.  When her contract was not “renewed” again, she sued for wrongful dismissal and got 16 months. 

Finally, if you have an employee who is being promoted or whose job is changing significantly, that IS a good time to do a revised contract.  There are cases where an employee was hired with an employment contract long ago (which limited the employer’s obligations on termination), but the nature of the job had changed so drastically that the court found the contract to be of no more effect. 

Doing one contract right at the time you hire an employee is more efficient, less risky and costs less than doing contracts every year.  Can there be any better reasons not to use successive one-year contracts?