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No duty to mitigate where employment contract stipulates severance

In his post entitled “Practical advice regarding dismissed employees and mitigation”, Andrew Taillon discussed the Ontario Superior Court of Justice decision in Bowes v. Goss Power Products Limited 2011 ONSC 4445. In that decision, the Court held that a dismissed employee has a duty to mitigate even where the employment contract expressly determines the appropriate amount of severance.

On June 21, the Ontario Court of Appeal reversed the trial decision in Bowes v. Goss. It  held that the duty to mitigate does not apply where an employment contract contains a clause setting out an employee’s severance entitlement arising from a termination without cause. However, the decision maintains the duty to mitigate where it is expressly incorporated in the employment contract.

The Court reasoned that a fixed notice period established in the employment contract is not the equivalent of common law damages for reasonable notice. Rather, severance payments under employment contracts should instead be treated as liquidated damages. Winkler C.J.O., for the Court, stated:

[37] When parties contract for a specified period of notice or pay in lieu they are choosing to opt out of the common law approach applied in Bardal. In doing so, the parties should not be taken as simply attempting to replicate common law reasonable notice. The Alberta Court of Appeal explained as follows in Brown v. Pronghorn Controls Ltd., 2011 ABCA 328 (CanLII), 2011 ABCA 328, 515 A.R. 128, at para. 47:

If the contract entitles the employee to payment of money, howsoever calculated, on termination, that right to that money is contractual. As such, the parties were not bound to specify an entitlement that is equal or even analogous to the quantum of reasonable notice that the common law might require if the contract was silent.

Damages for contractually stipulated notice or pay in lieu should not be analogized directly to damages for common law reasonable notice. The parties have specifically contracted for something different; it is an error to simply equate the two.

Winkler C.J.O. went on to conclude that, as there is appellate authority that the duty to mitigate does not apply to liquidated damages, an employee does not have to mitigate in respect of contractual notice periods.

The Court rejected the employer’s argument that it would be unfair to exclude the duty to mitigate from contractual severance payments. It emphasized that employment contracts are typically drafted in favour of employers and stated that “there is nothing unfair abour requiring employers to be explicit if they intend to require an employee to mitigate”. (para 55)

While some have described the decision as signficiant change in the law of mitigation, it is worthy of note that prior appellate decisions have come to similar conclusions. For example, in Boutcher v. Clearwater Seafoods Ltd. Partnership, 2010 NSCA 12, relied on by the Ontario Court of Appeal in Bowes v. Goss, the Nova Scotia Court of Appeal found that the trial judge erred in reducing a damage award for wrongful dismissal on the basis of a failure to mitigate. The Court held that the duty to mitigate did not apply to the contractually agreed upon severance payment. Fichaud JA stated:

[61] …[A]rticle 19 prescribed a fixed $25,000 to fully and finally settle Clearwater’s obligations under the employment contract. Nothing in the contract varied that sum based on any factors, such as those summarized in Bardal v. Globe & Mail Ltd …. that affect the calculation of reasonable notice. As “reasonable notice” is irrelevant, it would be incongruous to deduct the employee’s actual earnings during a period of hypothetical reasonable notice. Nothing … varied the $25,000 based on actual or potential earnings of the employee after his dismissal…. Rather article 19 shows an intent that a fixed $25,000 buys closure. Opening a dispute of the employee’s actual or potential earnings for an ongoing indeterminate period is the opposite of closure.

[62] Article 19, objectively interpreted, exhibits a contractual intent that Clearwater’s payment of $25,000 for its January 2003 breach of the Multi Trip Agreement be undiminished by any earnings that the Captains afterward either earned or reasonably could have been earned.

Bowes v. Goss clarified the law in Ontario and serves as an important reminder to employers that they should consider expressly incorporating the duty to mitigate in their employment contracts. However, it does not represent a fundamental shift in employment law in Canada.

Alison J. Bird
Cox & Palmer

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Alison J. Bird

Employment Lawyer at Cox & Palmer
Alison Bird is a lawyer practicing in Halifax with the Atlantic regional law firm, Cox & Palmer. Alison is growing her practice in the areas of labour & employment law and litigation. Alison is a frequent presenter on employment law topics and recently presented on the challenges being faced by employers dealing with changing demographics in the workplace. Read more
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