It is increasingly common for employers who are providing salary continuance in lieu of notice to insist that terminated employees notify them if they become re-employed during the notice period. Employers may then either cut off or reduce salary continuance payments from the point the former employee begins alternate employment, on the theory that the employee has now mitigated his or her losses.
But when an employment contract stipulates the specific notice period to which an employee will be entitled on termination, and is silent on any duty to mitigate, can the employer still rely on the duty to mitigate to justify cutting off salary continuance payments when the employee becomes re-employed? Or is the employer bound to make all the payments stipulated in the contract?
It will come as no great surprise to hear that this issue has been hotly debated between employer and employee counsel of late. The existing Ontario jurisprudence on the point was not entirely clear. That changed on June 21, when the Ontario Court of Appeal released its decision in Bowes v. Goss Power Products Ltd. Chief Justice Warren Winkler wrote on behalf of a five-judge panel, and resolved the issue conclusively in favour of the employee.
The facts of the case were straightforward and not really in dispute. The employee’s contract spelled out his entitlement upon termination without cause to a fixed period of notice or pay in lieu that varied according to his years of service. The employee had between three and four years’ service, entitling him to six months’ notice of termination or pay in lieu under the contract. The contract was silent about any duty to mitigate.
Upon termination, Goss Power Products Ltd. said it would provide Peter Bowes with six months’ salary continuance, but he had a duty to try to find a new job and notify the employer if he found one. He did find one at the same salary within two weeks. When Goss learned this, it paid out the statutory minimum of three weeks’ notice, and stopped making payments. It took the position that it was not responsible to pay any amounts Bowes had mitigated (and that he had in this case fully mitigated after two weeks). Bowes brought an application to determine his rights under the employment contract, seeking the balance of the six months’ notice pay.
The application was dismissed at first instance by Justice Kevin Whitaker, who held that it was “well established” that employees were obliged to mitigate in the absence of agreement to the contrary.”
The Court of Appeal allowed the appeal. It concluded the contractually specified termination payment was either a contractual debt due, or a liquidated damages amount. Either way, it did not constitute an award of damages at large under the common law. The parties, the court held, had expressly opted out of the common law regime of reasonable notice, instead specifying the amount that would be due on termination. Consequently, the common law duty mitigate damages did not apply.
Each of the parties, of course, had tried to claim the “fairness” high ground, with Bowes arguing it was unfair to reduce his bargained-for termination payment when his contract did not expressly allow it, and Goss arguing it would be unfair to allow the employee to get paid from two sources at the same time.
The court gave short shrift to the employer’s lament, writing: “To be clear, there is no double payment in the sense that the [employer] is paying twice.” Wrote Winkler, citing approvingly the words of Lord Justice Hutchison of the English Court of Appeal, who wrote in 1995’s Abrahams v. Performing Right Society Ltd.: “How could it be right to hold a plaintiff, who can show that his actual damage is greater, to the stipulated sum, but permit an employer who can show that it is less to take advantage of that fact?”
Two important observations flow from this decision. The first is that the issue decided in this case has broader application to contractual disputes generally, and is not confined to employment cases.
The Court of Appeal carefully distinguished damages at large for breach of contract from liquidated damages amounts to which the parties agree in advance. Mitigation applies only in the former case, where the relevant measure is the plaintiff’s actual loss, or the plaintiff’s notional damage in the case where the plaintiff could have reasonably mitigated but did not.
While it may seem unfair to deny defendants the benefit of mitigation when the parties try to simplify matters by agreeing to the dollar amounts in advance, it is not, because the plaintiff will be equally denied the opportunity to show his damages were actually more than had been agreed.
Second, having authoritatively established that the common law does not subject contractually specified termination amounts to mitigation, Winkler also held that “it is indisputable that the parties could have specifically agreed that mitigation did apply.” In other words, while the Court of Appeal has clarified the default position in the absence of a term to the contrary, it remains open to the parties to agree to a term that leaves the employee subject to an obligation to attempt to mitigate his or her damages.
Consequently, employers, employees, and their counsel will need to turn their minds to this issue when negotiating the terms of an employment agreement. Astute employer counsel will no doubt begin inserting “duty to mitigate” clauses in their employment agreements, and employee counsel will surely begin crossing them out, or watering them down.
As a result, unless the Court of Appeal has succeeded in persuading large swaths of employers to their view of the “fairness” of the situation, this particular disagreement may well remain alive, and be simply transplanted to the start of the employment relationship rather than the end.
Jean-Claude Killey is an associate at Paliare Roland Rosenberg Rothstein LLP in Toronto. He has a broad litigation practice that includes commercial matters and acts as prosecutor for regulatory bodies in the health sector, and represents professionals before other regulators. He represents clients in both French and English, and can be reached at firstname.lastname@example.org. Regular columnist Margaret Waddell returns next month.