EMPLOYEE REAPS A WINDFALL:

August 09, 2012

EMPLOYEE REAPS A WINDFALL:
COURT OF APPEAL REJECTS THE OBLIGATION OF MITIGATION

The principle of mitigation of breach of contract damages has long been enshrined in the common law.  The application of this principle to claim for wrongful dismissal has given rise to the concept of “notice of termination”.  If there is no cause for dismissal, the employee is technically entitled to compensation for the losses arising from this termination – i.e. all of the wages she would have earned had her employment continued.  While a dismissed employee is notionally entitled to compensation for the loss of income for the notice period, the obligation to mitigate damages in breach of contract actions requires that the dismissed employee make reasonable efforts to secure alternate employment.  The length of time required to secure such replacement employment is the basis of the concept of notice of dismissal – i.e. that is the period of time that the dismissed employee’s salary should be continued to allow her to find a new position.  However, what is the result in circumstances where the employee does not have a duty to mitigate?  If an employee is hired pursuant to an employment contract that fixes the notice entitlement on termination must he still mitigate his losses if he is terminated?  What damages is that employee entitled to as a result of the dismissal, and, in particular, how will a termination clause in an employment contract be interpreted in those circumstances?

It has become common‑place for mid‑level and senior employees to sign employment contracts when they are hired.  These contracts have become increasingly comprehensive, dealing with compensation, working conditions, privacy issues, and rights on termination.  In the latter category, many employers are now specifying the amount of notice, or pay in lieu of notice, that the employee will receive if terminated without cause.  These contracts may specify a fixed notice entitlement, one that varies according to the years of services, or may refer to some other criteria to determine the amount of notice payable.

In the absence of a contract, an employee is entitled to notice based on the common law – i.e. what the courts have awarded dismissed employees in similar situations.  However, an employee who is dismissed without cause has an obligation at common law to mitigate her losses  The interesting question has arisen as to whether an employee employed under an employment contract that fixes entitlement to pay in lieu of notice is still subject to the obligation to mitigate.  The issue was first considered by the British Columbia Court of Appeal in a 1988 decision.  In this case, the court dealt with the dismissal of a hockey coach employed pursuant to a fixed-term contract.  The coach was dismissed a year before the end of the term.  The coach was able to obtain a new position within a short time of his dismissal.  The coach sued the team for damages based on the unexpired portion of his employment contract, ignoring the fact that he had secured a new position and the earnings he had received as a result.  The Court of Appeal held that the former coach was obligated to mitigate his damages, as the damages he was claiming related to a breach of contract.  He was therefore only entitled to his actual losses, after factoring in the money earned from his new position.

The B.C. Court of Appeal took up the issue a number of years later again, in the case of an employee dismissed while employed under a fixed-term contract of one year.  The employee had been dismissed after only five months and sued for payment of the unexpired portion of the contract.  The employee had mitigated his damages but argued that he was entitled to payment under the terms of the contract regardless of his mitigation earnings.  The Court of Appeal rejected that argument and held that the employee was “under the usual obligation to take all reasonable steps to mitigate the loss…”  The Court of Appeal therefore rejected the employee’s claim.

The Ontario Court of Appeal recently considered this issue in a decision released on June 21, 2012.  The case dealt with an employee who had been working for his employer as the Vice President of Sales and Marketing for approximately three and a half years.  He had been employed pursuant to the provisions of a written employment contract which provided that, in the event of termination without cause, specific notice periods would apply, dependent on the length of service as of the date of termination.  Based on his years of service, the employee was entitled to six months’ notice or salary in lieu of notice.  On termination by the employer, the employer issued a letter to the employee seeking to impose an obligation on the employee to mitigate his damages by seeking a new position.  That provision was not contained in the employment contract.

When the employee found a new job two weeks after his termination, the employer ceased the payments of salary it had been making.  The employee sued for payment pursuant to the termination provisions of the contract.  The employee brought an application to determine his rights to payment of the balance owing under the contract.  The application judge held that, where a contract contains a fixed severance payment, the employee still has a duty to mitigate unless the agreement provides otherwise.  The employee appealed this decision which appeal was allowed by the Ontario Court of Appeal.

The Ontario Court of Appeal concluded that the employment agreement was silent on the duty to mitigate.  It held that the employer could not retroactively impose such a duty in the termination letter.  It also pointed out that the agreement contained a whole agreement clause which provided that any changes to the agreement had to be in writing.  The agreement was silent as to the employee’s duty to mitigate.  The employee was therefore entitled to be paid for the six‑month notice period.

The Court of Appeal first referred to the well‑settled principle that employment agreements are “subject to the ordinary principles of contract law” with the proviso that employment contracts are unique in that they all have an implied term that they can only be terminated on reasonable notice.  This implied term can be displaced by a specific provision in the agreement as to the required amount of notice on dismissal.  Such termination clauses provide certainty to the employer as to the amount of money to pay a dismissed employee, and may give some comfort to an employee who knows that he will receive some compensation should he be dismissed.

It was interesting to note that the Court of Appeal referred to contracts for sports figures, musicians, and film stars, and senior management for examples of provisions specifically exempting employees from the obligation to mitigate.  The court found that “where the rich, famous, and powerful are involved, there is no suggestion that such payments are unfair to the other contracting party even where there is, in effect, a total mitigation of the loss.  A contract is a contract, and it is expected that it will be honoured.  Nothing short of this can be countenance where the terminated employee is less privileged.”  The court also pointed out that such employment contracts are almost invariably drafted by the employers.  If the employer wanted to impose a duty to mitigate in the case of fixed termination clauses, it could seek to do so when the contract was prepared.  Finally, the court found that the parties obviously intended the clause to provide for certainty for both upon termination of the agreement.  The obligation to mitigate would compromise such certainty for the employee.  Therefore, interpreting the contract in that fashion would be contrary to the intentions of the parties.

In light of this strong unanimous decision by a five‑judge panel of the Court of Appeal, employment lawyers will doubtlessly be revising their employment agreements to either specifically provide for a requirement to mitigate, or to provide other mechanisms to reduce employer damages.

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