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Employers’ strategic use of employees’ duty to mitigate

strategyMitigation of damages in the context of a wrongful dismissal claim is one of those concepts that is often referred to but not well understood. Many employers fail to take advantage of the employee’s duty to mitigate in order to reduce their potential liability to the dismissed employee. In many cases, there are simple steps that an employer can take in order to improve their position in negotiation and litigation.

Simply put, the duty to mitigate one’s damages arises out of the law of contract, which requires that the party alleging a breach of contract on the part of the other party make reasonable efforts to reduce the damages that they suffered as a result of that breach. If the individual is able to obtain the same or similar goods or services elsewhere, the loss or damages that they suffer as a result of the breach of contract may be minimized. This is obviously good for the aggrieved party, and can also work to the benefit of the party that breached the contract, as their liability may be reduced or eliminated.

In the context of a wrongful dismissal claim, the duty to mitigate means that the individual in question must make reasonable efforts to find new employment. Traditionally, the threshold for showing that a dismissed employee made reasonable efforts has been relatively low. However, there have certainly been cases where an individual’s efforts have been shown to be so utterly lacking that the courts have reduced the notice period and corresponding damages to be paid by the employer.

Conversely, if the dismissed employee is successful in their mitigation efforts, and obtains new employment during the applicable notice period, their entitlement to damages will also be reduced. In that case, a court would assess the amount of pay in lieu of notice that would otherwise have been payable, and will then reduce the amount by the income actually earned by the plaintiff during that period. While some plaintiffs seem to feel as though the law means that they are “damned if they do and damned if they don’t”, this is not entirely accurate. While some plaintiffs seem to adopt an entitlement mentality when they are dismissed, the reality is that damages arising out of a wrong dismissal are intended to bridge the period between employment. They are not intended to be a windfall. As a result, it is somewhat inaccurate to suggest that an individual is “owed” the full amount of their pay throughout what would otherwise be the applicable notice period; if they obtain new employment sooner, their entitlement, and the former employer’s corresponding obligation, is reduced accordingly.

One issue that arises in some cases is how certain forms of income during the notice period should be treated. In some instances, I have seen employers argue that income from a second job should be treated as mitigation income and deducted from an employee’s entitlement to wrongful dismissal damages. The second job in these scenarios is a job that the individual held while they were working for the defending employer. It may have been a night job, or a job that was worked at times when they were not otherwise working for their primary employer. In such instances, income earned from the “second job” during the notice period would not properly be considered mitigation income, as it is income they would have earned anyway.

In Stewart v. Aim Supply Ltd., the Saskatchewan Court of Queen’s Bench held as follows

22 The defendant relied on Larsen v. Saskatchewan Transportation Co. (1993), 113 Sask. R. 185 (Sask. C.A.) in support of its submission that the plaintiff’s earnings as bartender should be applied towards reducing his damages. In Larsen, the Court of Appeal reduced the dismissed employee’s damages by an amount equal to the net income earned by a company he incorporated following his dismissal, and for which he worked without drawing a salary.

23 In my view, the decision in Larsen only applies where the discharged employee takes up employment following his dismissal and refuses to give it due recognition when claiming damages for wrongful dismissal. It does not apply where the dismissed employee merely continues with a pre-existing part-time employment outside normal business hours for the position he or she lost, i.e. a purchasing manager. Had the plaintiff dedicated significant time to his nightclub venture during normal business hours, the ratio in the Larsen may have applied. He did not. Therefore, the plaintiff’s compensation will not be reduced by his bartender earnings. However, if the individual increases their hours at the job as a result of the loss of their primary job, the incremental increase in income would, in the absence of other factors, be properly treated as mitigation income.

The other scenario that arises in some circumstances is one in which the dismissed employee has self-employment income from some sort of a business or consulting arrangement. In some cases, that income is properly treated as mitigation income. For example, if the individual elects not to seek new employment, but rather to start their own business, that essentially becomes their new employment and the income should be deducted from their damages. Similarly, if the individual already had a side business, and they increase the time and effort spent on that business as a result of the loss off their primary employment, the increase in business earnings would typically be treated as mitigation income. As set out by the B.C. Supreme Court in Coutts v. British Columbia:

46 … Mr. Coutts took those reasonable steps to replace his loss of earnings, as he was required to do, by increasing his private business from a part-time endeavour which was conducted to supplement his employment income, to a full-time operation. His income from that business, it is submitted, must be deducted from any award for damages for reasonable notice. Failure to make such a deduction would place Mr. Coutts in a better position than if he had received reasonable notice under his employment contract.

54 … had Mr. Coutts operated a business full-time, to the extent that it would have realized annual income of $55,529.16, while also employed full-time by the defendant, his obligations to his business would have impinged on his employment obligations to the defendant. … Mr. Coutts could not have reasonably acquired the excellent performance evaluations and the promotions he received had his energies been divided between two full-time demands. That inference may be drawn from the relatively consistent annual income of about $20,000 earned by Mr. Coutts when he operated his court reporting business on a part-time basis.

55 I have concluded, therefore, that $20,000 of the annual business income of $55,529.16 earned by him during the 22 month notice period, shall not be deducted from his award. This amount did not impinge on his employment obligations to the defendant. The remaining annual business income of $35,529.16, over the 22 month notice period, must be viewed as mitigation of his loss of earnings and be deducted from his award of damages.

However, if their earnings from that business remain the same as they were prior to the dismissal, those would not be deducted from the individual’s entitlement to wrongful dismissal damages. The Ontario Superior Court of Justice addressed such a scenario in Somir v. Canac Kitchens:

63 The defendant … alleges that any increase in income from the plaintiff’s income tax preparation business after his termination should be a credit against damages otherwise payable by Canac. It relies on the decision of the British Columbia Court of Appeal in Coutts v. British Columbia, [2000] B.C.J. No. 2110, in which a substantial increase in business was credited against damages otherwise payable. In that case, however, the terminated employee commenced operating a business on a full-time basis that had previously been run on a part-time basis. There is no evidence in the present action of any significant increase in time devoted by the plaintiff to his tax preparation business that prevented him from engaging in a reasonable job search or from accepting full-time employment if comparable employment had been offered to him. Accordingly, I have disregarded this income in the determination of the amount payable by the defendant.

In short, the critical factor will be whether the work in question replaced the work that was done for the former employer, or whether it was something that existed concurrently.

Employers and their counsel are well-advised to make inquiries regarding mitigation income prior to entering into any form of settlement agreement. The inquiries should not focus solely upon new employment, but should also address self-employment and other sources of income.

Employers involved in a wrongful dismissal dispute should also be proactive in monitoring mitigation opportunities. It should not be difficult for an employer to keep track of opportunities that might arise within their industry that the dismissed employee would be qualified to apply for. They should do so on an ongoing basis. This information can be used as evidence at trial in order to show that the individual did not make reasonable efforts to find new employment.

Furthermore, it is often strategic to send information about these opportunities to the dismissed employee or their counsel throughout the course of negotiations and litigation. By doing so, the implicit threat is that if the individual does not pursue those opportunities, the failure to do so will be used against them.

Unfortunately, many employers do not turn their minds to this issue until a trial or mediation hearing is approaching. At that time, it is usually too late, as the notice period will have ended long before. Employers should begin collecting this information from the moment that they dismiss an individual, and should use it strategically in order to reduce their potential liability.

Stuart Rudner
Miller Thomson LLP

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Stuart Rudner

Employment Lawyer at Rudner MacDonald LLP
Stuart Rudner is a leading HR Lawyer and a founding partner of Rudner MacDonald LLP, a firm specializing in Canadian Employment Law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is the author of You’re Fired! Just Cause for Dismissal in Canada, a textbook and database of summary dismissal cases published by Carswell. Read more
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2 thoughts on “Employers’ strategic use of employees’ duty to mitigate
  • Stuart Rudner says:

    An individual cannot receive pay in lieu of notice and EI benefits for the same period. Generally speaking, what happens when a wrongful dismissal claim is settled, the parties will agree that Service Canada will be provided with the relevant information and asked for a statement of how much, if any, must be repaid. That will then come out of the settlement amount. So, if the settlement is for $50,000, $10,000 may go to EI repayment and the balance to the employee. So the employer does not pay any less, but the employee does not receive the full amount from the employer.

  • Sujata says:

    What about EI benefits received by the employee – do they reduce entitlement to damages?