THE EMPLOYERS' EDGE
Court of Appeal Rules that Employees are NOT Required to Mitigate Damages when an Employment Agreement Provides for a Specified Notice Period
It is well established in Ontario that employment agreements are assumed to include a clause providing for reasonable notice to an employee prior to termination. Generally speaking, it is incumbent upon employees to mitigate damages associated with an action for wrongful termination by looking for and obtaining alternate employment. This implied duty to mitigate was confirmed in a recent 2011 decision from the Ontario Superior Court of Justice, Bowes v. Goss Power Products Ltd. However, the Ontario Court of Appeal recently overturned this decision and determined that an employee is not obligated to mitigate damages if an employment contract provides for a specific payment upon termination.
Facts
This case involved an employee with 4 years’ service, who was entitled to 6-months’ pay upon termination without cause under the terms of his employment agreement. The employment agreement spelled out varying notice periods dependent on his tenure and stipulated that acceptance of payment upon termination would fully satisfy any claim for compensation or damages arising from wrongful dismissal. However, the employment agreement was silent on the issue of mitigation.
After being terminated without cause the employee found new employment (within two weeks) at an equal salary and Goss Power Products Ltd. ceased paying the salary continuance. The employer’s position was that the employee had successfully mitigated his damages and therefore was only owed his minimum entitlements under the Employment Standards Act, 2000, S.O. 2000, c.41. The employee sought an application before the Ontario Superior Court of Justice declaring his rights under the employment agreement.
Trial and Appeal Decisions
In denying the employee’s application for full payment under the employment agreement, Justice Whitaker imported the duty to mitigate into the agreement. The Justice found that the parties had simply agreed upon a common law reasonable notice period and the principle of mitigation applies unless ousted expressly or by implication.
This line of reasoning was unanimously rejected at the Ontario Court of Appeal. Winkler C.J.O., writing for the court, rejected the notion that the fixed term of payment was equivalent to common law damages for reasonable notice. The court followed reasoning from Brown v. Pronghorn Controls Ltd., of the Alberta Court of Appeal, and found the parties were contractually opting out of the common law approach to reasonable notice. Therefore, the amount should be treated as a contractual sum or liquidated damages. In either case the duty to mitigate does not apply.
The Court of Appeal’s decision focused on the intention of the parties to avoid litigation. The terms of the employment agreement were meant to represent final and satisfactory completion of the employment relationship. The termination clause provided for certainty and finality. Allowing the issue of mitigation to remain following termination is contrary to that purpose and therefore was not read into the terms. Justice Winkler also noted that employment agreements are almost always drafted by the employer. Therefore it would be unfair for an employer to draft terms stipulating specific damages only to include a new term (mitigation) at the point of dismissal. The court concluded that mitigation will be a live issue only when damages are “at large”. If a contractual sum or liquidated damages is specified and the agreement is silent with respect to mitigation, the employee is not required to mitigate.
Lessons Moving Forward
While this case is not favourable to employers, it does provide an important lesson with respect to drafting employment agreements. Practically speaking it is advantageous for both sides to agree on a fixed termination notice or payment term at the commencement of the employment relationship. A well-constructed termination clause can help parties avoid litigation, offer employees certainty and allow employers to negotiate a lower reasonable notice period than the common law may require. However, these agreements will be read to promote certainty and therefore all terms should be express, clear, and specific. At the conclusion of the decision the Court of Appeal provided guidance to employers with respect to this matter. If an employer expects an employee to mitigate against the fixed amount of damages under the employment agreement they must express such terms in clear and specific language. In light of this decision, employers should consider amendments to existing employment agreements with fixed notice periods, with proper notice to employees, to include an express obligation to mitigate.
The lawyers at CCP can help you draft employment agreements, determine an employee’s entitlements upon termination and help draft appropriate amendments to existing agreements to address the Court of Appeal’s decision in this case.
Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.