It’s summer now, when I usually slow down on blogging, but every day lately, something new and exciting happens in labour and employment law! Here’s the newest jewell, brought to us by Chief Justice Winkler and the Ontario Court of Appeal today in a case called Bowes v. Goss Power Products.
For employers who like the idea of including an expressed notice term in their employment contracts, to avoid the implied duty to provide “reasonable” notice, pay attention.
Employee B. and Employer GP entered into an employment contract, drafted by the employer, which included a term saying that GP could terminate the contract without cause by providing notice, or pay in lieu of notice. At the time he is dismissed in 2011, the contract required 6 months notice, or pay in lieu thereof. The contract said nothing about a duty to mitigate. However, the termination later advised B that he would receive 6 month’s continuation of his salary, but also included a sentence saying that B is required to seek out alternative employment and advise GP if he gets a job. B obtained another job two weeks after being fired by GP.
GP declined to pay the continued salary beyond the 3 week period required by the ESA, taking the position that B had successfully mitigated.
Issue: Does an employee have a duty to mitigate when the contract specifies in writing the amount of notice required, and also the specific amount of pay in lieu of notice required, to terminate the contract?
Court of Appeal: Nope. There is no duty on an employee to mitigate when the amount the employer must pay the employee to terminate the contract is written into the contract, unless of course the contract expressly requires mitigation.
The lower court judge had followed a line of cases (including Graham v. Marleau Lemire Securities) finding that there was no legal difference, in terms of the duty to mitigation, between a written notice term and an implied ‘reasonable notice’ term. Recall that the requirement to provide ‘reasonable notice’ is an implied term, inserted into employment contracts by judges when the written contract is silent on how much notice is required to terminate the contract. The duty to mitigate is a requirement that follows a breach of contract. When an employer terminates a contract without giving ‘reasonable notice’, it is breaching the contract. The normal rules of damages specify that the employee by put into the position they would have been had reasonable notice be given, but that is subject to an obligation to make efforts to try and limit (or mitigate) those damages by looking for alternative work.
However, when a contract entitles an employee to a specific amount of notice (or money in lieu of notice), the employee is entitled to the contractual amount. The issue of mitigation does not arise, because the court is not assessing damages for a breach of contract. It is simply enforcing the clear language of the contract. The parties had agreed that, as a condition of the employer terminating the contract, the employee would be entitled to X amount of money. We can think of this a contractual requirement or as the fixing of ‘liquidated damages’, the purpose of which is to fix a sum to be paid the employee irrespective of the actual damage suffered by the employee, according to Winkler. The purpose of such a clause is to introduce certainty into the contract, which would be inconsistent with implying a duty to mitigate.
Thus, Winkler wrote:
An employment agreement that stipulates a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount. It follows that, in such cases, there is no obligation on the employee to mitigate his or her damages.
There’s some great comments by Winkler in response to the employer’s claim that it would be ‘unfair’ to allow the employee to keep both the severance payment the contract required, and his new salary at the new employer. Winkler writes:
It is worthy of emphasis that, in most cases, employment agreements are drafted primarily, if not exclusively, by the employer. In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages. In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from the fixed amount. Notably, the concern expressed in Graham seems to disregard the oft-observed disparity in bargaining power between employee and employer.
We saw the same Court note recently (in Braiden v. La-Z-Boy) that “in the employment context, there is inequality of bargaining power between employees and employers”, that employees are ‘vulnerable”, and that “recognition of this vulnerability is now so firmly embedded in the jurisprudence that it need hardly be recited.” Along the same lines is this little jewel about the desirability of the law treating the rich and famous the same as the ‘less privileged’ [though I note that B was a highly paid Vice-President]:
It is noteworthy that in the sports, entertainment and senior management fields it is commonplace for such contractual provisions to not be subject to mitigation. Where the rich, famous, and powerful are involved, there is no suggestion that such payments are unfair to the other contracting party, even where there is, in effect, total mitigation of the loss. A contract is a contract, and it is expected that it will be honoured. Nothing short of this can be countenanced where the terminated employee is less privileged.
Bowes v. Goss Power is yet another exhibit in the ongoing evolution of employment law that is treating the employment contract as a special species of contract characterized by the inequality of bargaining power and the vulnerability of one party.
The most likely impact of this decision will be that, in the future, employers will be careful to include an expressed requirement to mitigate if they elect to include a fixed amount of notice that exceeds the minimum statutory notice in employment standards legislation (there is no duty to mitigate associated with statutory notice requirements).
What do you think of this decision? Do you think it is ‘fair’ that the employee gets to keep both his 6 month’s pay from his previous employer and his pay from his new employer?