Employment Agreements and the Duty to Mitigate Revisited – Alan Melamud

Where an employment agreement specifies a fixed term of notice or pay in lieu of notice due to the employee upon dismissal, an employer will now have to expressly provide in the contract that the employee has a duty to mitigate if the employer wishes to preserve that obligation, based on a recent decision by a five-member panel of the Ontario Court of Appeal.

In Bowes v. Goss Power Products Ltd., [2012] O.J. No. 2811 (C.A.), the Court of Appeal overruled prevailing authority and held that where an employee’s entitlement to notice or pay in lieu of notice is set out in an employment contract, absent language in the agreement to the contrary, the employee has no duty to mitigate his or her loss.  Consequently, even where the employee finds new employment within the agreed upon notice period, the employer will still be required to pay the full entitlement set out in the contract.

In Bowes, the Plaintiff employee had a written employment agreement that, at the time of his dismissal, entitled him to six months’ notice upon termination.  The contract was silent on both the duty to mitigate specifically, and on the timing for payment of termination pay, a factor courts had previously relied upon as an indication as to whether mitigation was required.  Upon discovering that the Plaintiff had secured new employment at the same salary within two weeks of being terminated, the Defendant took the position that despite the termination provision in the employment contract, the Plaintiff was only entitled to the statutory minimum under the Employment Standards Act, 2000, S.O. 2000, c. 41 because he had mitigated his loss successfully.

The Application Judge accepted the Defendant’s position, relying on the then leading authority in Ontario, Graham v. Marleau, Lemire Securities Inc. (2000), 49 C.C.E.L. (2d) 289 (S.C.J.).  In Graham, Justice Nordheimer had held that the duty to mitigate applied even where there was an agreed upon severance entitlement, unless the employment contract expressly stipulated the contrary or required immediate payment of termination pay, which he held would rebut the presumption of the employee’s duty to mitigate. 

In Bowes, the Ontario Court of Appeal reversed the Application Judge and expressly disagreed with the reasoning in Graham.  The Court distinguished the situation where an employee is claiming common law reasonable notice, in which case the duty to mitigate applies, from where the employment agreement provide a set amount of notice due upon termination.  Where the agreement fixes the amount of notice, the Court of Appeal held that the employee does not have a duty to mitigate because the parties have effectively agreed on liquidated damages in the contract,

[W]here an employment agreement contains a stipulated entitlement on termination without cause, the amount in question is either liquidated damages or a contractual sum.  Either way, mitigation is irrelevant.

Not only did the Court’s decision do away with the presumption in favour of mitigation espoused in Graham, but the Court went a step further and established a presumption against the duty to mitigate where an employment contract provides for the amount of notice due upon termination.  Consequently, where an employment contract specifies the notice entitlement, employers who wish to have their employees subject to the duty to mitigate when they are dismissed should provide so expressly in the agreement.

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