Independent contractors have a duty to mitigate loss of fixed-term work

We have continually cautioned readers about the use of fixed-term employment contracts. The reason is simple: should fixed-term contracts be ended early, there is a high probability that dismissed employees may be entitled to payment for the balance of the remaining term.

In recent years, this has led to several staggering damages awards (with one as high as $1.2 million).

Part of the danger for employers is that Ontario courts have repeatedly affirmed the idea that dismissed workers are not subject to any duty to mitigate their losses if let go prior to the end of a fixed-term contract. Thus, it is entirely possible that an employee could be dismissed one day, find replacement work the next, and then receive an effective windfall in being paid two incomes for months (or years) going forward.

This summer the Court of Appeal added another wrinkle to the law of fixed-term contracts in Ontario.

At issue in Monterosso v. Metro Freightliner Hamilton Inc. (2023 ONCA 413) was an independent contractor who agreed to a 72-month fixed-term engagement. With 65 months of the term remaining, the independent contractor was dismissed without cause. The contractor in turn sued for damages reflecting the balance of the remaining fixed-term.

The contractor was successful at trial. He was awarded $552,500.00 (plus HST), calculated using the remaining monthly payments owed under the fixed-term agreement. In finding in favour of the contractor, the trial judge explicitly drew on employment law jurisprudence regarding how workers are to be treated if fired before the end of a fixed-term employment contract.

The appeal

The defendant businesses appealed the trial decision. Among other things, they argued that the trial judge had erred by applying employment law principles to an independent contractor.

The Court of Appeal agreed that the trial judge had made a mistake. Prior decisions from Ontario’s highest court had explicitly left open the question of whether independent contractors (as opposed to employees) are required to mitigate their losses if dismissed from fixed-term engagements. In now answering this question, the Court wrote:

The trial judge erred by conflating the situation of independent contractors with that of employees working under fixed-term contracts.

…

A duty to mitigate arises when a contract is breached, including contracts with independent contractors. Of course, the terms of a contract may provide otherwise. However, nothing in this case takes it outside the normal circumstances in which mitigation is required. For example, the respondent was not in an exclusive, employee-like relationship with the appellants, nor was he dependent on the appellants; the terms of the contract permitted the respondent to perform services for other parties. The matter was not argued fully before us, but for purposes of this appeal it suffices to say there was no basis for the trial judge to conclude that the respondent was not required to mitigate. [emphasis added]

After concluding that the contractor was subject to a duty to mitigate his loss of work, the Court of Appeal examined the contractor’s efforts to find a new job. These were determined to be “extensive,” despite the contractor’s lack of success. By contrast, the defendant businesses had led no evidence at trial to demonstrate there was work for the contractor to find.  

Having failed in their challenge of the contractor’s mitigation efforts, the defendants’ appeal was ultimately dismissed.

Takeaways

There are three important points that can be gleaned from the Monterosso decision.

First, fixed-term agreements (whether for employees or contractors) remain risky propositions. They should only be used in limited circumstances and after consultation with legal counsel. The $552,500.00+ damages award in this case provides yet another cautionary tale.

Second, the Court of Appeal has left open the question of whether dependent contractors (as opposed to independent contractors) have a duty to mitigate loss with respect to fixed-term contracts. From the language used by the Court of Appeal (quoted above), however, it seems likely that, in this regard, Ontario law will eventually decide to treat dependant contractors more like employees than independent contractors.

Finally, expect to see more disputes in future concerning worker classification. There is now a substantial advantage in being classified as an employee (or perhaps dependent contractor), at least as it concerns fixed-term contracts. This will inevitably lead parties to dispute whether they were engaged in a contractor or employment relationship.

This article was originally published on September 15, 2023 at First Reference Talks.

Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.