Is there a duty to mitigate? Not when the fix is in...the agreement

28 août 2012

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The Ontario Court of Appeal recently held that the duty to mitigate following dismissal does not apply when a dismissed employee’s contract contains an express notice of termination provision and is silent with respect to mitigation.

Facts and Judicial History

Peter Bowes (Bowes) began his employment with Goss Industries Inc. (Goss) in October 2007 as a Vice-President of Sales and Marketing.  As part of his employment contract, Bowes was entitled to six (6) months’ notice of termination (or pay in lieu thereof) if he was terminated without cause before completing four (4) years’ service with Goss.  Bowes was terminated without cause by Goss in April 2011.  Thus, Bowes was entitled to six (6) months’ salary continuation pursuant to his contract.

However, a dispute arose when Bowes secured new employment only two (2) weeks later at the same salary level. Upon becoming aware that Bowes was working again, Goss took the position that Bowes was only entitled to termination pay under the Employment Standards Act, 2000 (ESA) as he had successfully mitigated his loss at common law.  This common law duty holds that a former employee must make reasonable efforts to mitigate the damages payable by their former employer by seeking alternative sources of income. 

After not receiving further payments, Bowes brought a court application to determine his rights under his employment agreement.  The application judge held that Bowes had a duty to mitigate since his agreement did not directly or impliedly relieve him of this obligation.  Consequently, the judge held that Bowes was not entitled to further continuance payments (beyond termination pay under the ESA).

The Court of Appeal

The Court of Appeal overturned the application judge’s decision and held that when parties contract for a specified period of notice (or pay in lieu thereof) they are choosing to opt out of the “common law reasonable notice approach” and the employee is not required to mitigate.  In particular, the amount of notice specified becomes a contractual entitlement similar to liquidated damages and is not subject to mitigation in the absence of an express provision to that effect in the agreement.

The Court of Appeal further held that it would be unfair and counter-intuitive to permit an employer to benefit from the certainty of a fixed entitlement termination clause and also allow it to later claim that termination payments should be reduced by raising the issue of mitigation when it was not mentioned in the employment agreement. 

The Court of Appeal also took note of a broad release in Bowes’ employment agreement in favour of Goss.  This release stated that Bowes would forego any and all claims against Goss related to his termination (with the exception of claims to enforce the termination clause).  The Court of Appeal stated that such a broad release demonstrates an intention to avoid the courts and confirms a desire for finality.  In turn, this bolstered a finding that the parties intended that mitigation would not apply unless the agreement expressly stated otherwise.

Our Views

As it is common for employment agreements to contain fixed entitlement termination clauses, this decision is noteworthy for employers across Canada, and particularly in Ontario.  An employer considering hiring an individual under a contract with a fixed notice period in excess of statutory minimums must insert a clear requirement that the individual is subject to mitigation if it is intended that mitigation apply.  Otherwise, such employer will find themselves in the same situation that Goss did. 

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