Canada: Ontario Court Of Appeal: No Duty To Mitigate Contractual Severance Payments

The Ontario Court of Appeal recently released Bowes v. Goss Power Products Inc. (Bowes), a decision that should cause employers to review and revise employment agreements that offer fixed payments in lieu of notice to employees who are terminated without cause.

Background: reasonable notice of termination and the duty to mitigate

Employees who are terminated without cause are entitled to receive "reasonable notice" of their termination, or pay in lieu thereof. What constitutes reasonable notice varies in every case, generally based upon the employee's age, length of service, the nature of his or her position and the availability of similar employment. Whether or not the employee has been induced from secure employment to join the employer or has a specific characteristic that may make it more difficult to obtain other employment may also influence the length of the notice period awarded by the court.

To avoid the uncertainty of the above analysis, employers will often draft employment contracts that offer fixed payments to employees who are terminated without cause. In so doing, the employer avoids leaving the determination of the appropriate notice period to the courts.

Until Bowes, all employees who sought damages for the loss of their employment had a "duty to mitigate" their losses. This duty obligated the employee to seek out and accept reasonable alternate employment and it allowed the employer to reduce its obligation to pay common law notice—or termination payments fixed by contract—by the amount the employee earned in new employment. This principle was assumed to apply unless the parties expressly contracted out of it.

The effect of Bowes

Mr. Bowes was terminated from Goss Power Products Ltd. (Goss), without cause. His entitlements on termination were governed by an employment contract that provided him with six months' pay in lieu of notice. The contract was silent about Mr. Bowes' duty to mitigate his lost wages, and Goss began to pay Mr. Bowes his contractual entitlements.

Two weeks after his termination, Mr. Bowes found new employment at the same salary. Goss, finding out that Mr. Bowes had another job, stopped paying him his six-month contractual entitlements. Goss took this step on the long-held belief that an employee is required to mitigate his or her losses and the employer is entitled to rely upon the employee's mitigation, unless the contract of employment specifies otherwise.

The Ontario Court of Appeal disagreed with Goss' reasoning and, in the process, significantly changed the obligation of an employee to mitigate his or her losses where termination entitlements are fixed by contract.

The court's decision and its reasons

The court made three significant findings:

i. An employee does not have a duty to mitigate his or her losses where the employee's entitlement to notice of termination (or pay in lieu of notice) is set out in the employment contract;

ii. An employer cannot reduce the amount of notice of termination (or pay in lieu of notice) owed to the employee, even where the employee finds new employment during the contractually agreed upon notice period; and

iii. An employment agreement must clearly specify that the duty to mitigate applies, if an employer wants the employee to be subject to the duty to mitigate.

The court held that by fixing a contractual notice period in the employment agreement, employers and employees opt out of paying common law reasonable notice. In doing so, they avoid the uncertainty of having the appropriate amount of notice or pay in lieu of notice of termination decided by the courts. The court confirmed that this was an entirely appropriate contractual arrangement. However, because the notice or the payment in lieu of notice is owed under the contract, the employee cannot be required to seek out other employment nor can the notice or payments owed under the contract be reduced if other employment is found. In other words, the principle of mitigation does not apply where the employment contract sets out an employee's fixed entitlements on termination.

Contractual vs. common law entitlements

The court went on to distinguish contractual payments owed on termination from common law notice of termination, to which the duty to mitigate does apply. To demonstrate the difference between the two concepts, the court noted that Mr. Bowes' contractual entitlements were based on his base salary and car allowance. By contrast, Mr. Bowes' common law entitlements would also include bonus amounts and other monetary benefits and perquisites during the notice period. Noting the difference between the calculation of common law and contractual notice, the court found that it was entirely appropriate that mitigation should apply to one method of calculating damages for the loss of employment (common law) but not the other (contractual entitlements).

The court rejected Goss' argument that Mr. Bowes would effectively receive a double payment—his contractual entitlements and income from his new employment—if he were not required to mitigate his damages. The court noted that Goss was, in fact, only paying Mr. Bowes once and Bowes' contractual entitlements were potentially less than he would have earned had he been entitled to claim common law damages. Furthermore, the court noted that it is generally the employer that drafts the termination provisions in the employment contract and seeks to impose those provisions on employees:

In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages. In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from the fixed amount.

It was also held that it would undermine the certainty that the parties were trying to achieve by entering into the employment agreement if the court were to allow the principle of mitigation to potentially affect the employee's ability to recover his or her contractual entitlements. In support of this, the court noted that Mr. Bowes' employment agreement contained a release. The release was a further sign, the court held, that the parties were seeking finality and certainty regarding the employee's entitlements on termination and that, in these circumstances, Mr. Bowes should not be subject to the principle of mitigation.

The court did confirm that an employee is expected to mitigate any damages arising from the loss of his or her employment where there is no employment contract or the employment contract does not fix the amount of pay in lieu of notice that must be paid on termination.

Implications for employers

Employers using employment contracts that set out fixed notice periods or payments on without-cause terminations should carefully review and potentially revise those contracts. Revised contracts should specify that the employee's right to notice, or pay in lieu of notice, is subject to the duty to mitigate and that any earnings from new employment may be used to reduce contractual payments owed.

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