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Contracting out of common law

Recent court decision establishes an employment contract’s notice period can supersede any mitigation – or lack thereof – by the employee

By Jeffrey R. Smtih

The principle of reasonable notice of termination for employees is generally agreed to serve the purpose of easing the transition of employees and giving them a reasonable amount of time to find another job without too much financial hardship.

Whether it’s working notice or pay in lieu, the idea is an employee can look for a new job before she stops being paid. Of course, under common law, the employee is obligated to make efforts to find work during the notice period (mitigate her damages), or she could forfeit that pay. And if she does find work before the notice period elapses, the employer isn’t usually obligated to continue payment as the purpose of the notice period has been served.

But what happens when the employment contract has a termination clause that spells out the amount of notice to which the employee is entitled? It’s well-established in employment law that employers and employees can’t contract out of employment standards minimums. But as long as those minimums are met, the parties can agree to a notice period that would supersede any common law entitlement.

The Ontario Court of Appeal recently reached a decision that added another aspect to termination clauses. Overturning a lower court’s findings, the appeal court found that if there is an established notice period in a contract, the employer is bound to pay the full amount, regardless of whether the employee finds new work before the notice period is up. In addition, the notice period is set regardless of whether the employee even tries to look for work.

In this case, an employee with a termination clause providing six months’ notice was fired and found a new job less than two weeks later. However, the court found the employer must still pay out six months’ notice, saying a contractually agreed-to notice of termination replaces common law notice and its accompanying duty to mitigate by the employee, unless that duty is stipulated in the clause.

While a termination clause can provide an employer with a set cost and avoid potentially large common law entitlements to long-term or high-level employees, this court decision indicates that if a duty to mitigate isn’t set out, the employer could be stuck paying while the employee is working for someone else. Conversely, without that stipulated duty to mitigate, the employee could sit at home while receiving pay in lieu of notice without trying to find other work. Is this fair to the employer? Or is it a reasonable trade-off between the certainty of a specific notice period with the obligation to pay it in full regardless of the circumstances?

Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at employment law from a business perspective. He can be reached at jeffrey.r.smith@thomsonreuters.com or visit www.employmentlawtoday.com. For more information on this case, see page five of the July 16 issue of Canadian HR Reporter, where Ron Minken of Minken Employment Lawyers breaks down the ruling.

© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.

Jeffrey R. Smith

Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.
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