"you can't have your cake and eat it too": the duty to mitigate in employment agreements
The Ontario Court of Appeal has released a decision finding that a dismissed employee did not have an obligation to mitigate damages from the loss of his employment when he had an employment agreement that stipulated what he would receive if he was dismissed without cause.
In Bowes v. Goss Power Products Ltd.,1 the parties negotiated a severance provision in the employment agreement which provided for six months of notice, or pay in lieu, if Bowes' employment was terminated without cause. After Bowes was dismissed without cause, he found employment two weeks later at the same salary. The employer ceased paying him the contractual six months of notice as it believed Bowes had mitigated any damages arising from the loss of his employment.
Bowes brought an application seeking to enforce the terms of the contract. The application judge found against Bowes, holding that there is a duty on an employee to mitigate the loss of his employment even if there was a contract that set out what the employee would receive upon dismissal. Consistent with the previous jurisprudence, the application judge found that the duty to mitigate applied unless the contract relieved the employee of the duty to mitigate.
In overturning the application judge's decision, the five judge panel of the Ontario Court of Appeal held that by agreeing to a fixed notice period, the parties have contracted out of the common law concept of damages in lieu of notice, where the duty to mitigate arises. Instead, the parties have negotiated a liquidated damages clause or contractual sum that is not subject to the duty to mitigate.
In coming to this conclusion, the Court found that it would be unfair to permit an employer to raise the issue of mitigation after the employee has been terminated. The employer has ousted the common law by fixing an amount to be provided upon dismissal and cannot then seek to lower its contractual exposure if the employee obtains new employment after dismissal.
what this means for employers
There are many advantages to defining in advance the amount of notice, or pay in lieu, an employee will receive if the employee is dismissed without cause. It allows the parties to determine the amount of notice, how it will be calculated and paid, and most importantly removes the need to resort to litigation to determine what would be considered reasonable notice. By reversing the previous jurisprudence in Ontario, the Court of Appeal's decision requires employers to either expressly deal with mitigation in the employment agreement or lose the ability to claim a reduction based on mitigation. Employers should review their employment agreements to ensure that mitigation is dealt with in the termination provision.
by Dave McKechnie and George Waggott
1 2012 ONCA 425, released on June 21, 2012
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a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2012