Last week we reported on the Ontario Court of Appeal’s decision in Bowes v. Goss Power Products Ltd., which found that an employee does not have a duty to mitigate where an employment contract contains a fixed severance entitlement but no express requirement to mitigate. The Court of Appeal relied on a number of factors in coming to this conclusion which should provide a clear warning to employers across the country. This article sets out those factors and suggests ways in which employers can make their employment agreements or offer letters more bullet-proof.
Factors Relied on by the Court of Appeal
In concluding that termination payments in an employment agreement are not subject to the duty to mitigate unless the agreement specifically says so, the Court relied on the following factors:
- By contracting for a fixed sum, the parties contracted out of the common law “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 achieve 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.
- A broad release in an employment agreement 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.
Thus, where an employer opts to have an employment agreement containing a fixed severance entitlement and they intend for mitigation to apply upon termination without cause, they must express such an intention in clear and specific language in the contract.
Implications for Employers
Mitigation is not the only area where it can be important to have clear and specific language. We recommend that when preparing offer letters or employment agreements, employers take the time to explicitly set out other things such as:
- whether termination monies will be paid by way of lump sum or continuing payments, and whose decision it is where payment can be made either way;
- whether working notice can be provided instead of termination monies and, if so, whether that decision is at the employer’s discretion;
- whether the employee will have to sign a Release prior to receiving the termination monies. If so, include the form of Release the employee will have to sign;
- how much bonus, if any, the employee is entitled to for the portion of the year leading up to termination, as well as following termination. If there is any bonus entitlement, how it will be calculated and when it will be paid;
- which benefits and for what period, if any, will be continued – the statutory notice period only or beyond?
- what other benefits/perks, if any, the employee is entitled to compensation for in respect of the notice period and, if so, how will this be calculated;
- which obligations – non-compete, non-solicit, non-disclosure of confidential or other information – continue post termination and for how long;
- the amount of notice the employee is required to give upon resignation; and
- whether the employee can be temporarily laid-off in accordance with employment or labour standards legislation.
The Court of Appeal’s decision also stresses the importance of fairness to employees. If an employer is trying to limit a former employee’s entitlement to something included for the employer’s benefit, courts will likely be more ready to find in favour of the former employee if not sufficiently explicit. Employers across the country should keep this in mind when preparing offer letters or employment agreements.