Mitigation: Say What You Mean

Is an employee who is terminated without cause required to mitigate losses when an employment contract provides for a fixed term of notice or pay in lieu, but is silent with respect to the issue of mitigation? The Ontario Court of Appeal was recently faced with this issue.

Mitigation refers to a terminated employee’s obligation to make reasonable efforts to seek an alternative income source. As a result of the employee’s duty to mitigate, the employer is normally entitled to a credit for any income earned by the employee during the term of common law reasonable notice or credit against damages for failure to provide such notice. Nevertheless, amounts due to the employee upon termination under the Employment Standards Act are not subject to the employee’s duty to mitigate.

However, in Bowes v. Goss Power Products Ltd., 2012 CarswellOnt 7721, the employee, Mr. Bowes, and his employer had entered into a written contract in which they agreed that Mr. Bowes would receive six (6) months’ notice or pay in lieu thereof if his employment was to be terminated without cause. The contract, which was prepared by the employer, did not mention the employee’s duty to mitigate.

Approximately two (2) weeks after his employment was terminated without cause, Mr. Bowes found a new job at the same salary. The employer only paid Mr. Bowes three (3) weeks’ salary as required by the Employment Standards Act. Mr. Bowes subsequently sued for the six (6) months’ pay required by the contract, despite the fact that he had now mitigated his loss by obtaining alternate employment. While the Ontario Superior Court denied his claim, the Court of Appeal allowed the relief he sought. According to the Chief Justice Winkler,

“An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages…damages for contractually stipulated notice or pay in lieu should not be analogized directly to damages for common law reasonable notice. The parties specifically contracted for something different; it is an error to simply equate the two”.

He added that,

“…while it is indisputable that the parties could have specifically agreed that mitigation did apply, no presumption exists in law necessitating that it must be contracted away expressly”.

Therefore, since there was no mention of mitigation in the contract, no obligation to mitigate existed.

The moral of the story: Always say what you mean.

Don't forget the statutory severance pay!

Aside from higher than expected common law notice periods, employers should turn their attention to their possible obligation to pay statutory severance pay upon termination of employment.

For example, in  Ontario, the Employment Standards Act ("ESA") requires payment of up to 26 weeks of regular wages to terminated employees in certain circumstances. Most commonly, the severance pay obligation arises where the employer has a payroll of at least $2.5 million and the terminated employee has been employed for at least five years. Severance pay is payable in addition to any amount otherwise due to the employee by virtue of the ESA or an employment contract.

An employer is entitled to set-off and deduct from its ESA severance pay obligations certain amounts, such as "an amount paid to an employee for loss of employment under a provision of the employment contract if it is based upon length of employment, length of service or seniority". Therefore, the Divisional Court held in 2005 that "where the common law notice period is more generous than the ESA, the common law amount is awarded, but not both" [1].  

However, employers must exercise caution when providing working notice of termination.  For example, an Ontario Court was recently faced with an 26-year employee who claimed 26 weeks of severance pay despite her employer having provided 54 weeks of working notice of termination followed by a gratuitous payment of two months' salary [2].

While the employer argued that the combined effect of the working notice and the additional payment exceeded the 34-week ESA obligation (eight weeks of termination pay plus 26 weeks of severance pay), the Court disagreed and found that the two employment standards are "diferent and distinct" and could not be combined. While the employer met the eight week termination pay standard, the lengthy working notice period could not be used to offset the severnace pay oblgation. Accordingly, the Court awarded the employee 26 months of salary less the gratuitous eight-week payment. The decision was not appealed.

Therefore, employers governed by the ESA must take care to properly structure termination packages  to ensure that severance pay obligations are met. This is so even where employers are "very generous", the precise words used by the Court to describe the defendant in the case above.

[1] Boland v. APV Canada Inc., [2005] O.J. No 510.
[2] Mattiassi v. Hathro Management Partnership, 2011 CarswellOnt 11431 (Sm. Cl. Ct.)

Smashing the Reasonable Notice Ceiling

It is widely, but wrongly, assumed that common law reasonable notice of termination never exceeds 24 months. Yet Canadian courts have smashed the 24-month "ceiling" on  several occasions.

For example, last year an Ontario court awarded a 26-month notice period to a 65-year old assistant warehouse supervisor who had been employed for 35 years [1]. A decade earlier, the Ontario Court of Appeal upheld a trial decision of 27 months for a 60-year old senior manager of 35 years [2].

In 2003 a New Brunswick court went further when it awarded 28 months of salary to a pair of 31-year papermill supervisors ages 51 and 52 [3].  Seven years earlier, that province's highest court ruled that a 57-year old executive sports editor employed for 36 years was also entitled to 28 months [4]. 

It is important to note that none of these decisions involved a finding of bad faith or other objectionable behaviour on the part of the employer.[5]

The morale: Whether you are firing or have been fired, don't make assumptions. Instead, call an employment lawyer.

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[1] Hussain v. Suzuki Canada Ltd., 2011 CarswellOnt 12251
[2] Cowper v. Atomic Energy of Canada Ltd., 2000 CarswellOnt 1745
[3] Walsh v. UPM-Kymmene Mirimachi Inc., 2002 CarswellNB 533 (Q.B.), affd. [2003] N.B.J. No. 166 (C.A.)
[4] Donovan v. New Brunswick Publishing Co., 1996 CarswellNB 601 (C.A.)
[5] The Supreme Court of Canada ended the practice of extending notice periods to punish bad faith on the part of an employer, commonly known as a "Wallace bump-up". See Honda Canada Inc. v. Keays, [2008] 2 S.C.R. 362.

The Truth About Reference Letters

Employees should seek positive verbal and written references from their former employers upon termination.

Except where the employee has been fired for just cause, employers should provide a former employee with a positive reference.

Positive references help employees find new employment. The faster an employee obtains new employment, the less an employer may have to provide for pay in lieu of common law notice.

Nevertheless, an employer does not have a legal obligation to provide a positive reference letter. However, a simple letter confirming employment is generally required if the employee requests one.

A reference letter myth exposed

A recent newspaper article suggests that employers may be sued if they provide reference letters for employees who underperform at their next jobs. However, no such legal liability exists in Canada.

Nevertheless, the article does illustrate the need to "go behind" a reference letter when seeking to hire a new worker. Hence employees should secure a former employer's written promise to provide a positive verbal reference consistent with the reference letter.