The recent Ontario Court of Appeal decision in Brake v. PJ-M2R Restaurant Inc. is worthy of note for its commentary on a number of legal principles in employment law.

As a result of some performance concerns, a long-serving manager of a McDonald’s restaurant was given the choice of taking a demotion or being terminated. The employee refused to accept the demotion – which would have had her reporting to people whom she had trained and supervised – on the basis that she saw the demotion as both humiliating and embarrassing.

Instead, the employee filed a wrongful dismissal action, claiming constructive dismissal.

The employee was successful at trial. The trial judge awarded damages equivalent to 20 months’ pay, without deduction for income received during that period.

The employer appealed the trial decision, submitting that the trial judge erred in the following ways:

  • failing to give adequate reasons for his findings of fact;
  • finding the employee had been constructively dismissed;
  • failing to find that the employee’s refusal to accept the offer of continued employment (i.e., the demotion) amounted to a failure to mitigate her losses;
  • setting the notice period at 20 months; and
  • not deducting income received during the notice period from the damages awarded.

The Ontario Court of Appeal had no concerns with the sufficiency of the trial judge’s reasons and swiftly moved on to consider issues around constructive dismissal and the duty to mitigate.

As to constructive dismissal, the Court cited with approval an earlier ruling of the Supreme Court of Canada in which it had been noted that “a demotion, which generally means less prestige and status, is a substantial change to the essential terms of an employment contract that warrants a finding that the employee has been constructively dismissed.”

The Court rejected the employer’s assertion that the employee was required to accept the demotion as part of her duty to mitigate her losses. In doing so, the Court reasoned that the central issue was whether a reasonable person in the employee’s position would have accepted the offer and concluded that an employee is not obliged to mitigate by working in an atmosphere of hostility, embarrassment or humiliation. On the facts of this case, the Court accepted the trial judge’s finding that accepting the demotion – and working under those she had trained – would have been both humiliating and embarrassing.

As to the notice period, the Court had no difficulty with the trial judge’s assessment that a 20-year managerial employee was entitled to 20 months’ notice at common law (inclusive of statutory entitlements under the Employment Standards Act (“ESA”)).

The most interesting aspect of the Court’s decision lies in the Court’s reasoning around the duty to mitigate, particularly as it relates to income earned during the notice period.

The Court noted that, as a general matter, income earned during the notice period is appropriately deducted from any damages awarded. In this case, there were three sources of such income; (a) Employment Insurance (“EI”) benefits received; (b) employment income during the period of statutory entitlement; and (c) employment income during the balance of the notice period.

The Court confirmed the settled law that EI benefits are not to be deducted from damages awarded for wrongful dismissal.

As to the income the employee earned (termination and severance pay) during the ESA entitlement period, the Court reasoned that such statutory entitlements are not damages and, as such, any employment income earned during this period was not subject to deduction as mitigation income.

The Court’s treatment of the income the employee earned outside the period of ESA entitlement is worthy of note.

During this period, the employee worked at a grocery store and as a cashier at a hardware store. As the employee had worked part time at the grocery store while working at the McDonald’s restaurant, the Court concluded that the income she earned while continuing to work at the grocery store after being dismissed was not mutually exclusive of her former earnings and was, therefore, not subject to deduction from a damages award.

However, according to the concurring judgment, different considerations applied in relation to the cashier position obtained after she had been dismissed. Here, the Court noted that the cashier position was not comparable – both in terms of salary and responsibility – to the management position she had previously held. As such, the Court reasoned that “where a wrongfully dismissed employee is effectively forced to accept a much inferior position [in this case, as a cashier] because no comparable position is available, the amount she earns in that position is not mitigation of damages and need not be deducted from the amount the employer must pay.”

This appears to be a somewhat novel approach to the question of mitigation and may well represent a potentially important legal development. While the decision is of direct legal significance in Ontario, it remains to be seen how and whether courts in other provinces will respond to this development.