June 18, 2013

Duty to Mitigate

Following a recent ruling of the Ontario Court of Appeal, Bowes v. Goss Power Products Ltd., an employee in Ontario no longer has an obligation to mitigate when employment is terminated pursuant to an employment agreement that contemplates a fixed term of notice or pay in lieu of notice when the employment agreement does not expressly require the employee to mitigate.

Until this decision of the Court of Appeal, the lower courts in Ontario have consistently followed Justice Nordheimer’s reasoning in Graham v. Marleau, Lemire Securities Inc., which decision states that, “the mere fact that the parties have agreed on the period of reasonable notice does not mean that the obligation to mitigate is ousted by agreement.” If an employment agreement was silent on this issue of mitigation, the Courts considered it to be an implied term that an employee was required to make a reasonable effort to mitigate.

The question raised on appeal in Bowes v. Goss Power Products Ltd. was whether a fixed period of notice set out in an employment agreement, with no reference to mitigation, is subject to a duty to mitigate. The employment agreement between the parties in this case provided for a specific period of notice or pay in lieu of notice based on the employee’s years of service and was silent on the issue of mitigation. Additionally, the employment agreement contained a provision which released the employer from any claims made by the employee in relation to the termination of employment, other than to enforce the terms of the contract. The Court concluded that when an employment agreement stipulates that a fixed payment will be made upon termination of employment without cause and is silent regarding the employee’s obligation to mitigate, the employee will not be required to mitigate. The Court distinguished the payment of damages for common law reasonable notice and the payment of damages for contractually stipulated notice or pay in lieu of notice, and stated that when the parties establish a fixed period of notice or pay in lieu of notice, they are agreeing to contract out of the common law approach to reasonable notice.

The Court found that the objective of the parties in this case was to designate a stipulated sum owed to the employee upon termination of employment without cause, in order to establish certainty and closure. The employment agreement also contained a broad release to future claims made by the employee in relation to the termination of employment which was said to support a finding that there was an intention to avoid litigation and confirm the desire for certainty.

The Court reasoned that it would be unfair if the parties were to arrive at a fixed sum of damages payable upon termination of employment and subsequently permit the employer to reduce the fixed payment to account for mitigation when that requirement was not contemplated at the time the agreement was formed.

This decision will have a significant impact on many existing employment agreements. We recommend that employers review existing employment agreements for:

• clauses that provide for pay in lieu of notice, payable as a lump sum, whether the period of notice is fixed or based on a formula;

• clauses that provide pay in lieu of notice, payable as a salary continuation for a defined period, whether the period of notice is fixed or based on a formula; and

• term contracts which require that the balance of the contract be paid if employment is terminated prior to the date the contract is scheduled to end.

If the Company’s existing employment agreements provide for a fixed period of notice or pay in lieu of notice and are silent regarding the requirement to mitigate, we recommend that the agreements be revised when it is appropriate. Specifically, if the Company would like the fixed sum or fixed notice to be subject to the mitigation obligation, its contracts must now specifically say so.

We have set out below a few tips on how to introduce employment contracts to existing employees. The suggestions are necessarily generalized and may not be appropriate in every situation. When in doubt, legal advice is recommended.

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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