Lessons for employers
In its recent decision in Howard v Benson Group Inc the Ontario Court of Appeal ordered an employer to pay three years' compensation – amounting to more than C$200,000 – to an employee terminated without cause after 23 months. The employee was entitled to his full salary and benefits for the remainder of the five-year fixed-term employment contract because the contract did not clearly state otherwise.
The employer ran an automotive service centre and hired the employee as a truck shop manager. The parties entered into a five-year fixed-term contract. The employee was to earn $60,000 per year plus benefits. The employer terminated the employee without cause 23 months into his employment.
The employee sued for breach of contract, seeking compensation for the balance of his contract term.
The employer argued that the employment contract had expressly provided for early termination. It contained a clause that allowed the employer to terminate the contract early in exchange for the minimum severance amount allowed by statute.
Significantly, the motion judge held that the early termination clause – which referred to severance "in accordance with the Employment Standards Act of Ontario" – was too vague to be enforceable. Because of the clause's ambiguity, it was deemed to be invalid. Instead, the judge held that the employee was owed a reasonable notice period in accordance with Canadian common law.
The employee appealed, arguing that he was entitled to be paid his lost earnings up until the end of his contract. The employee argued that the significantly lower amount (because of his short service) for a reasonable notice period under common law did not apply, and that the common law duty to reduce or mitigate damages did apply.
The Ontario Court of Appeal sided with the employee. It found that not only was the employee entitled to be paid for the duration of the employment contract, but also that there was no obligation on him to reduce or mitigate his claim by obtaining other work.
The appeal court found that the motion judge had erred in awarding common law severance. The court set out the general rule regarding fixed-term employment contracts: in the absence of a clause that clearly limits an employee's entitlement, the employee is entitled to the compensation he or she would have earned by the end of the contract. As the early termination clause was not enforceable because of its vagueness, the general rule applied.
The court rejected the employer's argument that such a judgment would provide an unfair windfall to the employee. The employer was a sophisticated party and had drafted the employment contract. The onus was on the employer to clearly contract out of such an obligation if that was its intent. The court held that where an employer fails to use "unequivocal, clear language, it cannot complain when it is held to the remaining terms of the contract".
No duty to mitigate
In a double blow to the employer, the appeal court ruled that the employee had no duty to reduce or mitigate his damages by finding other work.
In a wrongful dismissal in Canada the employee generally must take reasonable steps to minimise his or her losses after termination by finding another job. However, the court held that employees have no such duty when a fixed-term contract is terminated early. The rationale behind this principle is that the employee would not receive severance if the contract ran its course. Conversely, should the contract terminate early, the employee is entitled to be paid for the full term, unless there is a specific clause to the contrary.
In light of the court's decision in Howard, employers should take on board the following lessons:
- Termination clauses should be drafted carefully – vague and ambiguous termination clauses will be unenforceable. While poorly drafted termination clauses may result in the employer being liable for common law damages, the termination of a fixed-term contract may incur a larger price tag.
- Courts are employee friendly – Howard reinforces the principle that courts take the power imbalance in employment relationships seriously. An employer's poor drafting of an employment contract will be held against it.
- Employees have no duty to mitigate with fixed-term contracts – unless there is a clear contractual requirement, there is no duty to mitigate with a fixed-term contract. Employers should think carefully about any without-cause termination of employees on fixed-term contracts.
For further information on this topic please contact Jacqueline Gant at Fasken Martineau DuMoulin LLP by telephone (+1 604 631 3131) or email ([email protected]). The Fasken Martineau DuMoulin LLP website can be accessed at www.fasken.com.