Canada: Contractual Termination Payments Not Subject To Mitigation

In its decision in Bowes v. Goss Power Products Ltd., released on June 21, 2012, the Ontario Court of Appeal confirmed that an employee's success in finding other employment will not reduce termination payments due under a contract, unless the employment contract contains clear and specific wording to the contrary.

The Facts

The employment contract at issue contained a termination provision providing Mr. Bowes with a fixed amount of notice or pay in lieu of notice if his employment was terminated without cause. The termination provision was silent with respect to his obligation to mitigate, and specifically, did not address whether successfully obtaining alternate employment would reduce his termination entitlements. When the company terminated Mr. Bowes' employment without cause on April 13, 2011, under the terms of the employment contract he was entitled to six months' pay in lieu of notice. Accordingly, the company advised Mr. Bowes that it would continue paying his salary for six months; however, it also advised him that he was required to seek alternate employment during that period and that if he was successful, his salary continuance would cease.

Two weeks after the termination of his employment, Mr. Bowes found alternate employment earning a comparable salary. Accordingly, after the company paid Mr. Bowes his statutory termination pay, it ceased paying him his salary continuance.

The Lower Court Decision

Mr. Bowes brought an application to the Superior Court of Justice for a determination of his termination entitlements. Mr. Bowes alleged that his employment contract set out a termination payment that was due and owing, and that he had no duty to mitigate that payment. The company argued that Mr. Bowes had only suffered two weeks' loss of salary, and paying him six months of salary would be inconsistent with a reasonable interpretation of his employment contract and prior case law in Ontario.

The Court agreed with the company, finding that while the parties had specified a period of reasonable notice in the employment contract, this did not eliminate the duty to mitigate. Specifically, the Court held that where an employment contract contains a fixed severance entitlement, that severance entitlement is subject to a duty to mitigate unless the contract, either directly or by implication, relieves the employee of that obligation. The judge hearing the application reasoned that since the obligation to mitigate arises where there is a claim for damages because reasonable notice is not provided, the obligation to mitigate should also arise where the parties have agreed on the period of reasonable notice. Because Mr. Bowes' employment contract did not contain a waiver of the duty to mitigate, the Court held that Mr. Bowes' mitigation earnings reduced his termination entitlements. As a result, the Court determined that Mr. Bowes was only entitled to statutory termination pay.

The Court of Appeal's Decision

The Court of Appeal disagreed with the lower court's decision. The Court of Appeal held that providing for a fixed amount of notice or pay in lieu of notice in an employment contract should not be treated the same as damages in lieu of reasonable notice. As the Court explained, employment contracts that do not provide for notice of termination or termination payments are subject to an implied term that reasonable notice of termination must be provided to an employee. In such circumstances, if an employer fails to provide reasonable notice of termination, the employee is entitled to damages for the breach of the implied term, and it is the employee's entitlement to these damages that is subject to the employee's obligation to mitigate. However, by agreeing in advance to a fixed amount of notice or pay in lieu of notice, the parties have contracted out of the common law and the implication of a term requiring reasonable notice of termination. Such an agreement should be treated as fixing liquidated damages or a contractual sum, neither of which are subject to mitigation. The Court went on to note that the goal of the parties in entering into the written employment contract and stipulating the amount of notice or pay in lieu of notice required to terminate employment was to create certainty about what would happen on termination and that interpreting the termination provision as leaving mitigation "in play" was inconsistent with this objective.

Accordingly, the Court held that where an employment contract provides for a fixed amount of notice or pay in lieu of notice upon termination without cause, and is silent with respect to the duty to mitigate, the employee will not be required to mitigate. The duty to mitigate will only apply where there is clear and specific language in the contract making the employer's obligation to provide payment subject to the employee's obligation to mitigate. In the result, the Court of Appeal issued a declaration that Mr. Bowes was entitled to the amount of salary in lieu of notice specified in his employment contract without reduction for any salary earned from his new employer.

Conclusion

Prior to this decision being released, there were a number of conflicting trial decisions in Ontario with respect to an employee's obligation to mitigate in the face of contractual termination entitlements. However, this decision from the Court of Appeal has now settled the law in Ontario and confirmed that there is no implied duty to mitigate in Ontario where a contract fixes the notice or pay in lieu of notice to which an employee is entitled. As the Court observed, this decision is consistent with decisions from appellate courts in a number of other Canadian provinces, including British Columbia and Alberta. Following this decision, when drafting employment contracts containing termination provisions, employers should address the question of mitigation explicitly if they wish to reduce the amount of a stipulated termination payment by taking into account future earnings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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