A recent decision of the Ontario Court of Appeal, Bowes v. Goss Power Products Ltd.,1 held that the duty to mitigate is no longer presumed to apply when there is a fixed severance entitlement negotiated into the termination clause of an employment agreement.
The duty to mitigate is a common law principle that, in the employment context, requires employees who are terminated without notice or with insufficient notice to look for a new job. Any remuneration earned with the new employer reduces damages that can be recovered from the employee's former employer as a result of the wrongful dismissal.
The Court of Appeal overturned a lower court's finding that a fixed severance entitlement is subject to the duty of mitigation unless the agreement, either directly or by implication, relieves the employee of this obligation. The lower court had wrongly decided that an agreement specifying a fixed severance entitlement, in the event of a dismissal without cause, was akin to damages in lieu of reasonable notice at common law and that there was a presumption that the employee had a duty to mitigate.
Peter Bowes commenced employment with Goss Power Products in October, 2007 as its Vice President, Sales and Marketing pursuant to an employment agreement which stated that:
The agreement went on to provide that the agreed-upon notice period was in compliance with Bowes' minimum entitlements under the Employment Standards Act, 2000 and was inclusive of all amounts owed to the employee under statute or common law. However, the employment agreement, drafted by the employer, was silent with respect to the duty to mitigate.
The employer later terminated Bowes without cause. The letter of termination stated that he would be paid his salary for six months but was required to seek alternative employment during this period and keep the employer apprised of his efforts in this regard. Approximately two weeks after he was terminated, Bowes obtained a new position at the same salary he was earning with Goss Power Products. After paying the statutorily required three weeks' salary, the employer stopped making any further payments.
Bowes brought an application in the Superior Court of Justice asking for a determination of his rights pursuant to the employment agreement. The application judge held that where an employment agreement contains a fixed severance entitlement, the agreement is subject to the duty to mitigate unless the agreement, either directly or by implication, relieves the employee of this obligation. Since the agreement provided no such exemption from the duty to mitigate, Bowes was not entitled to the full amount provided for under the agreement because he had mitigated his loss by finding new employment.
The Court of Appeal overturned the application judge's decision and concluded that where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate on the basis that:
- By contracting for a fixed sum the parties contracted out of the common law "reasonable notice" approach or damages in lieu thereof. There is no material difference whether the quantum contracted for is fixed or readily calculable from the terms of the agreement;
- By specifying an amount, the stipulated quantum is characterized as either liquidated damages or a contractual sum;
- It would be unfair to permit an employer to opt for certainty by specifying a fixed amount of damages and then allow the employer to later seek to obtain a lower amount at the expense of the employee by raising an issue of mitigation that was not mentioned in the employment agreement; and
- It is counter-intuitive and inconsistent for the parties to contract for certainty and finality, and yet leave mitigation as a live issue with the uncertainty, lack of finality and risk of litigation that would ensue as a consequence.2
Consequently, Bowes was entitled to the amount of salary in lieu of notice specified in his employment contract notwithstanding any salary he earned with his new employer.
The duty to mitigate at common law emphasizes economic efficiency, as the employer's liability is limited to the extent that the employee is able to obtain alternate work. However, as a result of this case, this principle can no longer be assumed to apply where a termination provision with a fixed notice or severance entitlementhas been negotiated – even if the employer explicitly informs the employee of his or her duty to mitigate the loss of employment at the time of termination.
The decision in Bowes also demonstrates that the courts will strictly interpret employment agreement termination clauses in favour of the employee's interests. In this way, the Court of Appeal's ruling is similar to the recent Ontario Superior Court decision in Wright v. The Young and Rubicam Group of Companies (Wunderman), which was detailed in a previous Osler update.
Employers who want to stop paying severance to an employee terminated without cause if the employee is successful in finding new employment should expressly reference the employee's duty to mitigate in the event of termination in the employment agreement.
Patrick Welsh has a broad corporate-commercial litigation and dispute resolution practice, with experience in environmental law and litigation and environmental due diligence. Steven Dickie's practice involves drafting and advising on workplace policies, employment contracts, executive compensation arrangements and corporate transactions.
1 2012 ONCA 425 (Bowes).
2 Bowes, at para 61.
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