Contractually set severance payments can remove dismissed worker’s duty to mitigate damages by looking for another job
As a general rule, dismissed employees have a duty to take reasonable steps to reduce or mitigate their loss by looking for another job. If an employment contract provides for a severance payment upon termination, the question is whether the employee is still obligated to mitigate her loss. Recently, the Ontario Court of Appeal touched on this issue in two cases: Soye v. Corinthian Colleges Inc. and Wronko v. Western Inventory Services.
It ultimately concluded that, when an employment contract expressly provides for a severance payout either immediately or very shortly after termination, it relieves an employee of the duty to mitigate her loss by looking for alternate employment.
In Wronko, Darrel Wronko was employed at Western Inventory as vice-president of national accounts and marketing. His employment contract included a severance provision for the payment of two years’ salary if he was terminated. The total amount of potential damages for his notice period of two years was $286,000. However, the court reduced his damages to $67,795 because he earned $218,205 in the two-year period following his termination.
A peculiar feature in Wronko is that, following the release of the judgment, Wronko requested and was given an opportunity to make written submissions with respect to damages. He argued his damages award should not have been subject to the duty to mitigate. In his post-judgment submissions, Wronko pointed to a clause in his employment contract that was not previously drawn to the court’s attention. It required Western Inventory to pay his severance payment of $286,000 by no later than Oct. 31, 2004. As a result, the court issued an addendum reversing its judgment to award damages equal to two years’ salary.
“By requiring (the employer) to make a lump sum payment shortly after termination, this term of the contract amounted to a waiver by (the employer) of any obligation on the part of (the employee) to mitigate,” said the court.
A related issue also came before the courts in Western Canada. In Mills v. Alberta the Alberta Court of Appeal established that, in cases where an employment contract contemplates a specific payment of salary in lieu of notice upon termination, an employee is contractually entitled to the salary component without obligation to mitigate losses.
The British Columbia Court of Appeal reasoned likewise in Philp v. Expo 86 Corp. However, in Neilson v. Vancouver Hockey Club Ltd., the same court suggested that, even where there is no duty to mitigate, moneys earned may be deducted from a damages award. While it may appear Neilson implicitly overruled Philp, the latter case is still being cited as authority for the proposition articulated in Mills and Philp. The common thread running through the discussed jurisdictions is the duty to mitigate does not arise whenever an employment contract obligates an employer to make a lump sum payment of severance immediately, or very shortly, after termination.
Mitigation doesn’t affect contractual pay: Court
In Soye, Corinthian Colleges acquired CDI Career Development Institute in August 2003. Corinthian made attempts to enter into new agreements with a number of CDI senior executives, including Desmond Soye. The parties failed to reach an agreement and on Sept. 11, 2003, Soye’s employment was terminated without cause.
His employment contract provided for the payment of 12 months’ salary upon termination. The court awarded Soye $418,732 in damages for wrongful dismissal, which included $5,123 in mitigation expenses Soye incurred while looking for another job. The Ontario Court of Appeal overturned the award for mitigation expenses, stating: “The agreement provided for payment in lieu of notice regardless of whether (Soye) mitigated.”
However, the decision is silent on how the court arrived at its conclusion. Arguably, a contractual guarantee of a cash payout upon termination is a “contractual right” to salary and not “damages.” As such, Soye was not subject to the duty to mitigate his loss.
When is there no duty to mitigate?
While Soye and Wronko certainly clarified the law of mitigation in Ontario, it is regrettable the court did not seize the opportunity to reconcile the approaches used by trial courts in deciding whether or not an employee is subject to the duty to mitigate. As such, employers are cautioned not to misinterpret the overall impact of the rulings on the general duty of mitigate. The duty to mitigate is presumed in every case, subject to the contracting parties’ contrary intention expressed in an employment contract.
At present, courts will likely find an employee is not subject to mitigation in the following circumstances:
• Where an employment contract provides for a lump sum payment immediately, or very shortly, after termination (per Soye; Wronko; Wells v. Conestoga Meat Packers Limited).
• Where a severance provision was intended to provide an employee with a minimum entitlement in the event of termination of employment (Eady v. TrekLogic Technologies Inc.).
• Where a termination provision contains an express obligation to continue to make the payment under an employment contract (Paquin v. Gainers Inc.).
• Where an employer’s policy provides an employee is relieved of the duty to mitigate at the event of termination (Jardine v. Gloucester (City)).
• Where a termination provision provides a choice between advance notice or a lump sum but no advance notice was provided (Orr v. Magna Entertainment Corp.).
• Where a severance provision contains an express waiver of the duty to mitigate (Neilson v. Vancouver Hockey Club Ltd.).
Soye and Wronko serve as useful reminders the disposition of any mitigation-related dispute would turn on a court’s scrutiny of the language of the severance provision. The main focus of inquiry will be the parties’ intention in relation to the timing and the manner of payment of severance in the event of termination. For employees, it will be prudent to ensure severance provisions in their contracts make it absolutely clear a contractual guarantee of a severance payout upon termination is not subject to mitigation.
For employers, these decisions underscore the importance of clear, direct and precise language in an employment contract, especially when drafting termination and mitigation provisions. Properly drafted, severance clauses may substantially reduce employers’ liability for damages because any amount earned in mitigation will be credited against their damages.
For more information see:
•Soye v. Corinthian Colleges Inc., 2009 CarswellOnt 1848.
•Wronko v. Western Inventory Services, 2008 CarswellOnt 3610 (Ont. C.A.).
•Mills v. Alberta, 1986 CarswellAlta 149 (Alta. C.A.).
•Philp v. Expo 86 Corp., 1987 CarswellBC 335 (B.C. C.A.).
•Wells v. Conestoga Meat Packers Limited, 2007 CarswellOnt 7197 (Ont. S.C.J.).
•Eady v. TrekLogic Technologies Inc. (April 30, 2008), Doc. 04-CV-280897 (Ont. S.C.J.).
•Paquin v. Gainers Inc., 1991 CarswellAlta 88 (Alta. C.A).
•Jardine v. Gloucester (City), 1999 CarswellOnt 437 (Ont. Gen. Div.).
•Orr v. Magna Entertainment Corp., 2008 CarswellOnt 2398 (Ont. S.C.J.).
•Neilson v. Vancouver Hockey Club Ltd., 1988 CarswellBC 143 (B.C. C.A.).
Nikolay Chsherbinin is an employment lawyer at Grosman, Grosman and Gale in Toronto. He can be reached at (416) 364-9599 or [email protected].
