It has been a fundamental principle of employment law that terminated employees generally have an obligation to seek alternate employment to minimize or mitigate their resulting losses.The damages they can claim in a law suit against the terminating employer are primarily the pay that would have been received during the period of reasonable notice, net of any other earnings. But does this same rule apply where a contract specifies the employee’s severance entitlement?
In an important recent decision, Bowes v. Goss Power Products Ltd. (PDF), the Ontario Court of Appeal concluded that the duty to mitigate does not, in fact, apply where employment contracts contain specific termination payments and the employment relationship is terminated without cause.
Mr. Bowes was a Vice President of Sales and Marketing for Goss Power Products. He entered into a written contract of employment with the Company. It contained a severance entitlement payable upon termination without cause. This was based on a formula, so he would receive a certain number of months’ notice or pay in lieu thereof depending on his years of service. The contract was silent with respect to any duty to mitigate during the notice or payout period.
The Company terminated Bowes without cause. Bowes received a termination letter stating that he would be paid his salary for six months pursuant to the employment contract. But it also said that he was required to seek alternative employment during this period and advise the Company of the results of his search.
Bowes was fortunate enough to obtain a new position at the same salary approximately two weeks after termination. The Company then paid only his minimum entitlements under the Employment Standards Act. It did not pay the balance of what might have been owed under the severance clause of the contract.
Bowes then brought a court application against the Company, seeking the balance of his contractual severance package. He argued that he had no duty to mitigate in relation to the contractual amounts.
At the first level, Bowes lost. The judge ruled that the duty to mitigate applies even where an agreement contains a fixed severance entitlement. This is so unless the agreement, either directly or by implication, exempts the employee from this obligation.
This agreement did not provide such an exemption. Since Bowes had mitigated his damages by obtaining his new job, he was not entitled to the full amount which might otherwise have been payable under the contract.
On appeal, the court held that contractually-specified termination and severance amounts are not equivalent to damages in lieu of notice at common law. Rather, where an employment agreement stipulates an entitlement on termination without cause, the specified amount constitutes either liquidated damages or a contractually agreed sum payable upon termination. As such, the duty to mitigate does not apply.
Take away for employers
Employers must now be more careful to ensure that their employment agreements are explicit as to whether the duty to mitigate will apply to any contractual severance payments above and beyond the statutory minimum. If the contract is silent, this decision will be used to argue there must be no offset for post-employment mitigation earnings.