By Jennifer Craig

As outlined in the summary below, the responsibility of employers to honour severance provisions, as agreed upon in non-Common Law ‘Employment Agreements’, is not diminished by an employee’s duty to mitigate—particularly when the severance provision hinges upon the employers’ ability to terminate the contract at any time. In short, payment in lieu of a fixed term of notice is not subject to the duty to mitigate.

Bowes v. Goss Power Products Ltd., 2012 ONCA 425
The employee, Bowes, entered into an employment agreement with Goss Industries Inc., the predecessor of the employer, on September 26, 2007 (the “Employment Agreement”).  The Employment Agreement was prepared by the employer, and included a severance provision that stipulated the employer could terminate the contract without cause by providing notice, or pay in lieu thereof.

On April 13, 2011, the employer terminated Bowes’ employment without cause.   Pursuant to the severance provision in the Employment Agreement, Bowes was entitled to six months notice, or pay in lieu thereof.  While the Employment Agreement was silent with respect to the duty to mitigate, the letter of termination advised Bowes that he was required to seek out and locate alternate employment and advise the employer immediately if he got a job.  Two weeks later, on April 25, 2011, Bowes commenced employment with another employer at the same salary he had been paid by the employer.

Upon becoming aware that Bowes had secured alternate employment, the employer took the position that he was only entitled to receive the minimum entitlement under the Employment Standards Act, 2000, S.O. 2000, c. 41 of three weeks’ pay in lieu of notice.  The basis for this position was that Bowes had mitigated his loss, which ended the employer’s obligation to continue paying salary continuance under the Employment Agreement.

Decision of the Application Judge
Bowes brought an application for a determination of his rights under the Employment Agreement, asserting that he was entitled to receive all of the termination pay set out in the Employment Agreement and that the payment was not subject to the duty to mitigate.

Applying the decision of Justice Nordheimer in Graham v. Marleau, Lemire Securities Inc., [2000] O.J. No. 383, the application judge concluded that the duty to mitigate applied to the calculation of damages.  He opined that, while parties are free to contract out of the obligation to mitigate, either expressly or by implication, the fact that they have agreed on “reasonable notice does not mean that the obligation to mitigate is ousted by agreement.”  Mitigation will be assumed as a general principle of contract law and the parties must, in their choice of language, indicate that the presumption is rebutted.

Bowes was therefore “obliged to mitigate” and entitled only to the statutory minimum under the Employment Standards Act, 2000.

Decision of the Court of Appeal
Chief Justice Winkler allowed the appeal, finding that the application judge erred in three respects:

(1) A fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice

Chief Justice Winkler held that Justice Nordheimer in Graham and the application judge erred by treating a contractually fixed term of notice as effectively indistinguishable from common law reasonable notice.

Following the decision of the Alberta Court of Appeal in Brown v. Pronghorn Controls Ltd., 2011 ABCA 328, the Chief Justice held:

When parties contract for a specified period of notice of pay in lieu they are choosing to opt out of the common law approach applied in Bardal.  In doing so, the parties should not be taken as simply attempting to replicate common law reasonable notice … Damages for contractually stipulated notice or pay in lieu should not be analogized directly to damages for common law reasonable notice. The parties have specifically contracted for something different; it is an error to simply equate the two.

(2) Payment in lieu of a fixed term of notice, being liquidated damages or a contractual amount, is not subject to the duty to mitigate.

Having concluded that the damages flowing from the breach of a contractually stipulated term of notice are indistinguishable from damages for breach of reasonable notice at common law, the application judge erred when he concluded that the duty to mitigate applied to the contractual term as it did at common law.

Chief Justice Winkler observed that the preponderance of appellate jurisprudence supports the view that mitigation does not apply to liquidated damages or a contractual amount.  While it is indisputable that the parties could have specifically agreed that mitigation did apply, no presumption exists in law necessitating that it must be contracted away expressly.

(3) Concerns regarding the employee’s “golden parachute” or any potential unfairness to the employer are without merit.

The employer raised a concern about Bowes, in effect, receiving double payment.  The Chief Justice held that this allegation was unfounded, stating:

… A contract is a contract, and it is expected that it will be honoured.

He went on to note that in most cases, employment agreements are drafted primarily by the employer.  There is nothing unfair about requiring an employer to be explicit if it intends to require an employee to mitigate what would otherwise be fixed or liquidated damages.  What would be unfair, however, 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.

Lesson for Employers

Chief Justice Winkler found that the clear goals of the parties in entering into an employment agreement that designates a stipulated sum owed upon termination without cause are certainty and closure.  To interpret the agreement so as to leave mitigation in play would be contrary to these goals.

For this reason, if the employment agreement specifies a fixed amount of damages and you intend for mitigation to apply upon termination without cause, this intention must be expressed in clear and specific language in the agreement.

Jennifer Craig is a lawyer with Roper Greyell LLP, a Vancouver-based employment and labour law boutique firm. Jennifer can be reached at jcraig@ropergreyell.com. For more information about Roper Greyell, visit www.ropergreyell.com.

While every effort has been made to ensure accuracy in this article, you are urged to seek specific advice on matters of concern and not to rely solely on what is contained herein.  The article is for general information purposes only and does not constitute legal advice.