Does the duty to mitigate apply to all dismissed employees?

While the application of common law reasonable notice remains central to the determination of damages in wrongful termination cases, written employment agreements, with termination clauses fixing notice entitlement in the event of termination, are becoming more common.

Employers, no doubt, resort to written agreements with the aim of limiting their exposure to damages upon an employee’s without cause termination.  Such written contracts may be attractive to the employer as they create a degree of certainty and predictability in terms of the employer’s liability in the event the employer ends the employment relationship.  However, unless carefully drafted, a written agreement might not necessarily limit an employer’s exposure to the extent desired.

For example, in Bowes v. Goss Power Products Ltd., 2012 ONCA 425 (CanLII),  the Ontario Court of Appeal recently considered the issue of an employee’s duty to mitigate in the face of a written employment agreement where the parties had agreed to fix the amount of notice payable upon termination.

Mr. Bowes worked for Goss Power for just over 42 months.  There was a written employment agreement, prepared by Goss Power.  The employee’s entitlement upon termination, without cause, was set out at paragraph 30(c) which provides that:

30. The Employee’s employment may be terminated in the following manner and in the following circumstances:

(c) By the Employer at any time without cause by providing the Employee with the following period of notice, or pay in lieu thereof:

Six (6) months if the Employee’s employment is terminated prior to the completion of forty-eight (48) months of service;

Following his dismissal, and in accordance with paragraph 30(c), Goss Power initially confirmed that Mr. Bowes would be paid his salary for a period of six months.  The employer also advised Mr. Bowes that he had a duty to seek alternate employment during the notice period, and to keep Goss Power updated on his mitigation efforts.  However, the employment agreement itself made no reference to mitigation.

About 12 days after his termination, Mr. Bowes found a new job paying him a salary equivalent to that which he was being paid at Goss Power.  Goss Power then ceased further payments on the basis that the employee had fully mitigated his losses.

The employee commenced an application under rule 14.5 of the Rules of Civil Procedures, R.R.O, 1990, Reg. 194, seeking a determination of his rights under his employment contract.  In support of his application, Mr. Bowes argued that, given that the notice period was fixed by terms of the contract, there was no accompanying duty to mitigate.  He argued, therefore, that he should be entitled to the full 6 months’ pay in lieu of notice, despite having found replacement employment.

However, the lower court agreed with the employer in finding that the Mr. Bowes was not entitled to any further payments, as he had fully mitigated his damages with his new employment.  The court found that this was consistent with the case law, and that absent an agreement to the contrary, a dismissed employee has a duty to mitigate.

In setting aside the lower court’s decision, the Court of Appeal states at paragraph 34 that:

An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.

The Court of Appeal points out that it was an error to consider employment contracts with fixed notice periods as being akin to damages in lieu of notice at common law.  According to the Court, the correct approach is that the fixed notice should be regarded as liquidated damages or a contractual sum, which is not subject to mitigation.  The Court also rejected the lower court’s view that a duty to mitigate applies unless the contract provides otherwise.  Instead, the Court of Appeal holds that where the employment agreement is silent on mitigation, the common law duty to mitigate will not be applicable.

Brown Litigation regularly advises and assists both employers and employees with respect to contracts of employment, and has traditionally recommended that the contracting parties specifically stipulate if any notice period is subject to mitigation or setoff.  The Court of Appeal has now confirmed the importance of proper planning and contract review.

Posted by D. Jared Brown – Lead Counsel