It has been a fundamental principle of employment law that
terminated employees generally have an obligation to seek alternate
employment to minimize or mitigate their resulting losses.The
damages they can claim in a law suit against the terminating
employer are primarily the pay that would have been received during
the period of reasonable notice, net of any other earnings. But
does this same rule apply where a contract specifies the
employee's severance entitlement?
In an important recent decision, Bowes v. Goss Power Products
Ltd. (PDF), the Ontario Court of Appeal
concluded that the duty to mitigate does not, in fact, apply where
employment contracts contain specific termination payments and the
employment relationship is terminated without cause.
Mr. Bowes was a Vice President of Sales and Marketing for Goss
Power Products. He entered into a written contract of employment
with the Company. It contained a severance entitlement payable upon
termination without cause. This was based on a formula, so he would
receive a certain number of months' notice or pay in lieu
thereof depending on his years of service. The contract was silent
with respect to any duty to mitigate during the notice or payout
The Company terminated Bowes without cause. Bowes received a
termination letter stating that he would be paid his salary for six
months pursuant to the employment contract. But it also said
that he was required to seek alternative employment during this
period and advise the Company of the results of his search.
Bowes was fortunate enough to obtain a new position at the same
salary approximately two weeks after termination. The Company then
paid only his minimum entitlements under the Employment
Standards Act. It did not pay the balance of what might have
been owed under the severance clause of the contract.
Bowes then brought a court application against the Company,
seeking the balance of his contractual severance package. He
argued that he had no duty to mitigate in relation to the
At the first level, Bowes lost. The judge ruled that the duty to
mitigate applies even where an agreement contains a fixed severance
entitlement. This is so unless the agreement, either directly or by
implication, exempts the employee from this obligation.
This agreement did not provide such an exemption. Since Bowes
had mitigated his damages by obtaining his new job, he was not
entitled to the full amount which might otherwise have been payable
under the contract.
On appeal, the court held that contractually-specified
termination and severance amounts are not equivalent to damages in
lieu of notice at common law. Rather, where an employment agreement
stipulates an entitlement on termination without cause, the
specified amount constitutes either liquidated damages or a
contractually agreed sum payable upon termination. As such,
the duty to mitigate does not apply.
Take away for employers
Employers must now be more careful to ensure that their
employment agreements are explicit as to whether the duty to
mitigate will apply to any contractual severance payments above and
beyond the statutory minimum. If the contract is silent, this
decision will be used to argue there must be no offset for
post-employment mitigation earnings.
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