A Termination Clause Is Presumed To Rebute The Duty To Mitigate
An employee who is terminated without cause is not required to mitigate his or her loss when his or her employment contract specifies a fixed term of notice or pay in lieu and the employment contract is silent with respect to mitigation. This statement of law was recently confirmed by the Ontario Court of Appeal in the 2012 decision Bowes v Goss Power Products Ltd.1
In Bowes, Chief Justice Winkler, writing for a five-member panel of the Court of Appeal, held that if an employment agreement specifies the amount payable to an employee if the employer terminates the employment contract, whether fixed or readily calculable, the parties have contracted out of the common law presumption of providing reasonable notice of dismissal. The employee will not have an obligation to mitigate his or her damages by seeking new employment unless mitigation is expressly required by the employment contract. The Chief Justice summarized his reasoning at paragraph 61 as follows:
- By contracting for a fixed sum the parties have contracted out of the Bardal “reasonable notice” approach or damages in lieu thereof. There is no material difference whether the quantum contracted for is fixed or readily calculable from the terms of the agreement.
- By specifying an amount, the stipulated quantum is characterized as either liquidated damages or a contractual sum.
- Mitigation is a live issue at law only where damages are at large, i.e. damages in lieu of reasonable notice. Mitigation is not applicable if the damages are either liquidated or a contractual sum.
- It would be unfair to permit an employer to opt for certainty by specifying a fixed amount of damages and then allow the employer to later seek to obtain a lower amount at the expense of the employee by raising an issue of mitigation that was not mentioned in the employment agreement.
- It is counter-intuitive and inconsistent for the parties to contract for certainty and finality, and yet leave mitigation as a live issue with the uncertainty, lack of finality, risk, and litigation that would ensue as a consequence.
- Thus, where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.
- Moreover, a broad release in an employment agreement, as here, demonstrates an intention to avoid resort to the courts, confirms a desire for finality, and bolsters a finding that the parties intended that mitigation would not be required unless the agreement expressly stipulates to the contrary.
Employers who desire to require former employees to mitigate their damages and thereby potentially reduce the amount to which employees are entitled upon dismissal must ensure that the employment agreement expressly states that the termination entitlement is subject to the duty to mitigate. A major problem faced by employers whose current employment contracts contain termination clauses silent on the subject of mitigation is that they cannot simply have their current employees sign new employment contracts containing a revised termination clause. A court is unlikely to enforce the new termination provision because the revised employment contract will lack the necessary consideration to form a legally binding contract.
Bowes is significant because it explicitly found that the reasoning of Justice Nordheimer in his 2000 decision Graham v. Marleau, Lemire Securities Inc.2 was an error. Prior to the release of Bowes, Graham had been the leading decision on point with many considering the issue to be settled law in Ontario.
The practical impact of Bowes is significant. A fairly significant percentage of employees in Toronto and the rest of Ontario have employment contracts that contain termination clauses that are silent with respect to mitigation. Previously it was presumed that the severance or termination payments set out in these employment contracts were subject to the duty to mitigate. Bowes, however, has inverted this presumption. As a result, the cost of terminating employees has increased for a number of employers in the Greater Toronto Area (“GTA”). Employers cannot simply revise the termination clause in the employment contracts of their current employers, tell their employees to sign the revised employment contracts, and expect that a court will enforce the revised clause. Following the reasoning set out in various Court of Appeal decisions such as Hobbs v. TDI Canada Ltd.3, a court will not enforce the revised employment agreement because the contract will be found to lack the necessary consideration to form a binding contract. For the revised employment contracts to be enforceable, the employer will be required to provide new consideration.
Employers seeking to have their employees sign revised employment contracts should first consult a qualified labour and employment lawyer to ensure that the proper procedure is followed.