Chris Rootham gratefully acknowledges the assistance of Frances Munn, Student-at-Law in gathering information for this article.
The Ontario Court of Appeal recently determined that employees who are contractually entitled to an agreed-upon period of notice (or pay in lieu of notice) are entitled to receive the full value of the notice period, unless their employment agreement expressly states that the payment is subject to mitigation: Bowes v. Goss Power Products Ltd.
Employment agreements often specify the amount of notice (or pay in lieu) the employer will provide in the event of termination without cause. Until this new decision, employers could pay the notice amount by way of salary continuance that ended if the employee successfully mitigated (reduced) any damages flowing from the termination by starting new employment or self employment. Employers often offered to pay out 50% of the value of the remaining salary continuance, but there was no legal requirement to do so. As long as the minimum requirements of the Employment Standards Act had been satisfied, the employee would not have a legal right to any additional amounts. The effect of the Bowes decision is that, unless an employment agreement explicitly references mitigation, employees will be entitled to the full value of the notice period specified in the agreement.
Mr. Bowes was terminated without cause from his employment. According to the terms of his contract, he was entitled to six months of working notice or salary in lieu of notice. His contract did not anything about mitigation. Two weeks after his termination, he found another job and the employer stopped his salary payments.
At trial, Mr. Bowes asserted his entitlement to the full six months’ salary. The employer argued that it was settled case law that a terminated employee has a duty to mitigate his or her losses. The trial judge agreed, finding that even when an employment contract specifies a notice period, the employee is not exempt from the common law duty to mitigate.
The Court of Appeal disagreed. It concluded that a fixed period of notice or pay in lieu of notice is different than a determination of reasonable notice at common law. When parties agree to a fixed period of notice, they are choosing to opt out of the common law approach to reasonable notice. Mr. Bowes was entitled to the fixed benefit the employer had offered to provide in the event of termination – that is, six months of pay – and the employer could not benefit from his early success in finding new employment.
The Court observed that it is not unfair to require employers (who usually draft the employment contract) to be explicit if they want to take advantage of an employee's successful mitigation. Conversely, it is unfair for an employer to agree upon a fixed amount of damages, only to inform the employee upon dismissal that he or she has a duty to mitigate.
The primary impact of this case will be with respect to existing employment contracts with a fixed notice period that are silent on the issue of mitigation.