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Ontario Court of Appeal addresses the issue of what constitutes mitigation income

mitigation“As a result of this recent decision from Ontario’s Court of Appeal, counsel need to be mindful of the fact that not all mitigation income is equal, and some may not be counted as mitigation income at all.”

When I have a consultation with an individual that has recently lost their job, I always explain to them that “severance” is intended to be a bridge to their next job, and not a windfall. This comes as a surprise to many, who see severance as more of an entitlement. In many cases, they are deeply offended by severance packages that include a “clawback” in the event that they obtain new employment during the notice period. When I explain to them that the concept is consistent with the law, and that if they were to proceed with a claim for wrongful dismissal, income earned during the notice period would be deducted from the amounts that their former employer owes them, they are often shocked.

As has been recently reported, the recent decision of the Ontario Court of Appeal in Brake v. PJ-M2R Restaurant Inc., 2017 ONCA 402 (CanLII) addressed the issue of mitigation, confirmed some concepts and also clarified others. Specifically, the Court confirmed that unlike common-law severance, statutory entitlements to Termination Pay and/or Severance Pay are not subject to mitigation. Rather, an individual is entitled to those amounts even if they find new work the very next day after being dismissed.

The Court addressed the issue of what constitutes mitigation income for purposes of assessing any required deductions from common law entitlements. They wrote as follows:

[96] An employee who is dismissed without reasonable notice is entitled to damages for breach of contract based on the employment income the employee would have earned during the reasonable notice period, less any amounts received in mitigation of loss during the notice period: Sylvester v. British Columbia, 1997 CanLII 353 (SCC), [1997] 2 S.C.R. 315, at paras. 14-17.

[97] While this general statement of principle governs, I would not reduce the damages award by the amounts that Ms. Brake received during the notice period because, in my view, they are not “amounts received in mitigation of loss”.

The Court confirmed that mitigation income refers to new employment or self-employment, and not a position already held by the individual. In Brake, the plaintiff had a part-time job during the course of their employment. The Court also confirmed that simply continuing to work at that part-time job was not a replacement for the lost employment. Rather, it was just a continuation of an existing income stream. As a result, money earned from that part-time job was not to be deducted from any severance amounts owing. As they wrote:

[140] In a wrongful dismissal action, an employer is generally entitled to a deduction for income earned by the dismissed employee from other sources during the common law notice period. However, as Rand J. explained in Karas v. Rowlett, 1943 CanLII 53 (SCC), [1944] S.C.R. 1, at p. 8, for income earned by the plaintiff after a breach of contract to be deductible from damages, “the performance in mitigation and that provided or contemplated under the original contract must be mutually exclusive, and the mitigation, in that sense, is a substitute for the other.” Therefore, if an employee has committed herself to full-time employment with one employer, but her employment contract permits for simultaneous employment with another employer, and the first employer terminates her without notice, any income from the second employer that she could have earned while continuing with the first is not deductible from her damages: see S.M. Waddams, The Law of Damages, loose-leaf (Rel. Nov. 2016), 2d ed. (Toronto: Canada Law Book, 1991), at para. 15.780.

One issue that sometimes arises in this context is how to treat a situation where the individual had a part-time job previously, but after they lose their primary source of income, they take on additional hours. For example, assume that while they had their “day job”, they worked 10 hours per week at a second job. Assume further that once they lose their primary job, they asked for and were given an additional 10 hours per week, or even full-time employment. Presumably, the additional income would count as mitigation income, as it was intended to replace the income lost when the primary employment ended. The Court explicitly declined to address this issue:

[145] Whether Ms. Brake’s Sobey’s income exceeded an amount that could reasonably be considered as “supplementary” and, therefore, not in substitution for her employment income was not argued. On the facts of this case, the amounts received from Sobey’s do not rise to such a level that her work at Sobey’s can be seen as a substitute for her work at PJ-M2R. I leave for another day the question as to when supplementary employment income rises to a level that it (or a portion of it) should be considered as a substitute for the amounts that would have been earned under the original contract and, accordingly, be treated as deductible mitigation income.

The third issue that the Court addressed was the fact that the plaintiff had been forced to take a job at Home Depot in order to make ends meet. This was seen as a lesser job, and she only earned approximately $600. Interestingly, the Court held that the income from his job was not to be counted as mitigation income, and therefore did not deduct it from the award. As Feldman J.A. wrote in her concurring opinion:

[154] I fully concur with the result reached by Gillese J.A., and with her excellent reasons. However, with respect to the income the respondent earns as a cashier at Home Depot, in my view, the trial judge was entitled to make the following finding:

The cashier position she occupies now at Home Depot is so substantially inferior to the managerial position she held with the Defendant that the former does not diminish the loss of the latter.

[155] It was on that basis that the trial judge declined to deduct the Home Depot income that the respondent earned during the notice period from her damages for wrongful dismissal. I would uphold that decision.

This last point is somewhat surprising. Most employment lawyers will advise their plaintiff clients that any income from new employment or self-employment constitutes mitigation income and will be deducted from their entitlement to severance. Typically, there is no distinction made between income from a comparable position and income from a lesser one. As a result of this recent decision from Ontario’s Court of Appeal, counsel need to be mindful of the fact that not all mitigation income is equal, and some may not be counted as mitigation income at all.

On a somewhat related note, most readers will be familiar with the common practice of offering salary and benefit continuance in a severance package along with a clawback which provides that once the individual obtains new employment or self-employment, the salary and benefit continuance will cease, and a percentage of the amount of salary remaining will be paid as a lump sum. Typically, the trigger for the clawback is “any” employment or self-employment. In many cases, we assist our clients to negotiate a threshold below which the clawback will not apply. For example, we try to include a percentage of their previous earnings, so that only employment or self-employment that provides them with at least X% of their previous compensation will cause the clawback to be applied. As I often say, otherwise taking a job as a greeter at Walmart, making minimum wage and working only a few hours a week, would trigger the clawback and cost them far more than they will earn in their new position. The decision of the Court of Appeal is consistent with this approach. However, the decision does not provide any clarity or easy means of determining when income will constitute mitigation income and when it will not. Presumably, every case will have to be assessed based upon its own particular set of circumstances.

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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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