June 14, 2012by Israel Foulon LLP
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 states that, “[T]he 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.
The decision of the Ontario Court of Appeal, Bowes v. Goss Power Products Ltd., will have a significant impact on many existing employment agreements. We recommend that employers review existing employment agreements for:
1. 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;
2. 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
3. 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 and implemented when it is appropriate. 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.
Introducing revised employment contracts for existing employees
An employer generally cannot insist that existing employees sign a written contract without providing the employees with new consideration for signing the contract. Quite innocently the employer may be altering rights the employee has gained through tenure and if challenged, the courts may find the contract unenforceable. With significant unilateral changes to the employment contract, an employer runs the risk that an employee may commence an action for constructive dismissal.
The following are situations which create an opportunity for the employer to implement a written employment contract for an existing employee:
the employee is being offered a promotion;
the employee is being offered an increase in remuneration; or
the employee is being offered a discretionary bonus payment that they otherwise would not receive.
The offer of an additional payment or promotion should be made conditional on the execution of a written employment contract. Similar to the implementation of a written employment contract for a new hire, a specific process should be followed when implementing written contracts for existing employees:
the employment contract should be presented to and reviewed with the employee in advance to allow him/her sufficient time to review it and obtain independent legal advice;
the existing employee should not be allowed to sign the contract at the time the contract is initially presented
the employee should be given a date by which the contract must be signed and returned; and
the employee should not commence the new position, receive increased remuneration or the additional bonus payment prior to the contract being signed and returned.
Where an employee refuses to sign the new contract, the employer has the right to not implement the promotion, salary increase or discretionary payment. An employer can also make a decision to provide employees with working notice of termination for failure to sign an employment agreement (with possible ESA severance obligations at the end of the working notice period) where an employer has made a determination that all employees must be governed by employment contracts.
Implementing a new employment contract with existing employees is very tricky. We recommend that an employer obtain legal advice both in respect of the contents of the proposed new contract and the method of implementation.