Employers Need To Review Their Employment Contracts

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Unless Contract Clearly States So, Terminated Employee Not Required to Mitigate Damages If Contract Sets Out Notice Period

The Ontario Court of Appeal’s decision in Bowes v. Goss Power Products Ltd. has provided clarity for both employers and employees who are bound by a written employment agreement which contains a fixed severance entitlement. The Court of Appeal confirmed that a terminated employee is not required to mitigate his damages if his contract of employment stipulates the notice period to which he is entitled upon termination unless the contract clearly states otherwise.

The common law in Ontario requires that employers give reasonable notice of termination to their employees. The length of such notice, or pay in lieu of notice, depends on a variety of factors, and in extreme cases can be as long as 24 months. If an employee is terminated without reasonable notice – i.e. wrongfully dismissed – he can sue the employer for damages equal to the wages and benefits he would have earned during the reasonable notice period. The damages he would be entitled to, however, are reduced by any wages he may have earned during the notice period, or would have earned if he had acted reasonably.

Employers can avoid these lengthy notice periods by stipulating in a written employment agreement exactly what an employee’s entitlement is upon termination. Typically, such agreed-upon notice periods would be less than that to which an employee would be entitled at common law. One issue that has arisen from time to time, is whether an employee who was subject to a contractually fixed notice period was required to mitigate his damages – that is, deduct from his fixed severance entitlement any income he  earned during the period of severance entitlement.

The Ontario Court of Appeal answered that question in the Bowes decision. Chief Justice Winkler, in writing for the Court, found that where an employment agreement contains a stipulated entitlement on termination, that entitlement ought to be considered either liquidated damages or a contractual entitlement. In the circumstances, he found that mitigation was irrelevant. This finding was based, in part, on the fact that it would be unfair to permit an employer to "opt for certainty by specifying a fixed amount of damages and then allow the employer to later seek to obtain a lower amount at the expense of the employee by raising an issue of mitigation...". Furthermore, he said it would be counterintuitive and inconsistent for the parties to contract for certainty and finality, and yet leave mitigation as a live issue with the uncertainty, lack of finality, risk and litigation that would ensue as a consequence.

The Court of Appeal did, however, state that an employer and employee could make any contractual notice period subject to mitigation by expressly stating so in the written employment agreement.

So take note: If employers want to ensure that terminated employees are subject to the duty to mitigate, notwithstanding that they are entitled to a contractually fixed notice period, that obligation should be clearly spelled out in the written employment agreement.

David Spears is a Partner at BrazeauSeller.LLP.  His practice focuses on employment issues.  David can be reached at dspears@brazeauseller.com or 613-237-4000 ext. 207.

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