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$550,000 award highlights risks for employers with fixed-term contracts, raises issues around duty to mitigate

Monterosso v Metro Freightliner Hamilton Inc., 2023 ONCA 413, is a recent Ontario Court of Appeal decision that highlights the dangers of using fixed term contracts. This decision also addresses the obligations of mitigating damages under fixed term agreements (i.e., the obligation to look for new work after termination).

Background

The appellants (Metro Freightliner) hired the respondent (Monterosso) as an independent contractor with a 72-month fixed term contract. In November 2017, Metro Freightliner terminated the contract with Monterosso on a without cause basis. Monterosso then sued for payment of the remaining 65 months of the contract term.

At trial, the judge determined that there was no provision in the contract that permitted its early termination. As such, the judge awarded Monterosso payment of the remainder of the contract, calculated to be $552,500 plus HST.

Metro Freightliner appealed the trial decision arguing that the trial judge erred by determining that Monterosso was not required to mitigate his damages, despite the fact that the contract did not permit early termination.

The court’s decision

The Ontario Court of Appeal accepted Metro Freightliner’s argument that the trial judge erred with respect to Monterosso’s obligation to mitigate.

The trial judge had conflated the obligations of independent contractors and employees. Employees do not have a duty to mitigate following the breach of a fixed term contract (see Howard v Benson Group Inc., 2016 ONCA 256.)

However, it had been left open by the courts as to whether the Benson principle applied to independent contractors with fixed term agreements.

In Monterosso v Metro Freightliner Hamilton Inc., the court stated that there was nothing that took the case “outside the normal situation in which mitigation is required” and that there was no basis for the trial judge to decide that Monterosso was not required to mitigate his damages as an independent contractor.

That said, the court suggested there may be situations in which the circumstances of a contractor relationship could still mean there is no duty to mitigate: for example, if there is an “exclusive, employee-like relationship” between the parties, if the contractor is dependent on the contracting entity, or if the contract did not permit the contractor to perform services for any other businesses. The Monterosso case did not meet these exceptions.

Despite the Ontario Court of Appeal accepting Metro Freightliner’s argument regarding Monterosso’s obligation to mitigate his damages due to his independent contractor status, ultimately this did not have an impact upon the final determination, because Monterosso had filed evidence of his unsuccessful search for another contractor position (which demonstrated that he did meet his duty to mitigate).

As such, the result was the same as the trial judge’s determination and Metro Freightliner’s appeal was dismissed.

Lessons for employers

This case was a very expensive lesson to Metro Freightliner about the dangers of using fixed term contracts — especially a fixed term contract without an early termination provision.

While this case involved an independent contractor, it also highlights the increased danger of using a fixed-term contract for an employee. The court has held that employees do not have a duty to mitigate damages following the termination of a fixed term employment contract. This means that, in such situations, employers cannot argue that there should be a reduction in the amount owed to the employee for the employee’s failure to mitigate their damages (i.e., look for a new job).

Further, employees in Ontario are protected by the Employment Standards Act, 2000 (the “ESA”). This means that even if a fixed term employment contract has an early termination provision, the employer may still be required to pay the employee for the remainder of the term of the contract if that termination provision is found to be contrary to the ESA.

True independent contractors do not have the same protections under the ESA as employees; as such, if the contract between Metro Freightliner and Monterosso had an early termination provision, it would have greatly limited what Monterosso was entitled to following its termination. This was an expensive mistake made by Metro Freightliner, which underscores the importance of expertly drafted agreements.

Employers should also be careful to properly classify their workers. The courts will look at the facts of the relationship to determine whether the worker is truly an independent contractor, or if they are actually an employee or a “dependent contractor” (i.e., a worker who is not protected by the ESA, but who does have more termination rights than an independent contractor).

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.