Do independent contractors have a duty to mitigate?

“It’s pretty significant,” says Alessandra Fusco, an associate at Cassels in Toronto, speaking about a recent case from of the Ontario Court of Appeal which she says provided much-needed clarity.

“It’s definitely a good decision to clear up some of the ambiguity around whether or not an independent contractor who's subject to a fixed-term contract ordinarily has an obligation to mitigate their damages in the event of early termination — unless the contract provides otherwise.”

The case also serves as a reminder to employers around the use of contractors and termination agreements.

Dismissal after 8 months leads to $552,500 in damages

A group of companies (Metro Freightliner Hamilton, Metro Truck Niagara and Metro Collision Services) engaged Antonio Monterosso as an independent contractor.

He was hired on March 7, 2017 for a 72-month term. But eight months later, his services were terminated without cause.

The contract did not have a termination provision and it “clearly and unambiguously” provided for a 72-month fixed term, according to the trial judge, who awarded Monterosso $552,500 plus HST based on the remaining monthly payments due under the contract.

In the appeal, Metro said the trial judge failed to consider email correspondence in March 2017 that demonstrated a provision was added to the contract to ensure Monterosso would be paid up until the last day of active service.

But in the June 14, 2023 decision, the appeal court judge said the email correspondence was “ambiguous” and the contract contained an “entire agreement clause” which was intended to avoid this argument.

Independent contractors’ duty to mitigate

However, the appeal court did agree that the trial judge erred “by conflating the situation of independent contractors with that of employees working under fixed-term contracts.”

The appeal court cited the 2016 decision Howard v. Benson Group, which found that employees under fixed-term contracts were entitled to damages equal to the loss of remuneration for the balance of the fixed term, without a duty to mitigate.

“This court has never held that independent contractors do not have a duty to mitigate following breach of a fixed-term contract,” it said.

“A duty to mitigate arises when a contract is breached, including contracts with independent contractors. Of course, the terms of a contract may provide otherwise. However, nothing in this case takes it outside the normal circumstances in which mitigation is required. For example, the respondent was not in an exclusive, employee-like relationship with the appellants, nor was he dependent on the appellants; the terms of the contract permitted the respondent to perform services for other parties.”

In this case, the contractor detailed his unsuccessful job search efforts -- though the group of companies said he was looking for work beyond his expertise -- so the appeal court found that Metro failed to establish that Monterosso failed in his duty to mitigate, and the appeal was dismissed.

Why termination agreements are necessary

One important takeaway is that all contracts should have a termination clause in them, if there is a possibility that the contract is going to end before the specified end date, says Tracy Lyle, a partner at Nelligan Law in Ottawa.

“Most contracts would have a clause… saying that the written terms of the contract are the complete contract. And that is to prevent people from relying on evidence saying, ‘Oh, we had an oral agreement…’ or ‘They said they were going to pay me this’ or ‘They told me this….’ It’s to make sure that things are clear and unambiguous.”

“That might seem like common sense to a lot of people, but it might not,” she says.

Even with an indefinite term, you still want that termination agreement in there, says Fusco.

“Unless the contract provides otherwise, you'll want to make sure that everything is clear within the agreement. It's always better to ensure that everything's in the contract, so that these issues don't arise.”

With an indefinite term, you're still going to need the termination clause because you still want to know what the cost of ending that relationship is going to be, says Lye.

“All contracts should have a notice provision, if there's an intention that the party is going to want to end the contract before the end date, so that people know what their obligations are, on both sides of the coin.”

Employers like clarity, and they want predictability to manage their business, to understand their financial obligations, she says, so “a fixed term can often be better, in particular, for independent contractors.”

Distinguishing between different types of contractors, employees

The June 14 decision also highlights the importance of confirming what kind of relationship employers have with the people they hire.

“One of the things that will be essential is the distinction between dependent and independent contractors in determining the potential liabilities and obligations. So if an independent contractor is properly classified, they will be subject to the duty to mitigate. However, dependent contractors and other workers in an employee-like relationship with their clients may not be subject to such duty,” says Fusco.

“It's super important for employers to ensure that their agreements are drafted carefully to ensure that the intentions of the parties are accurately reflected.”

The law draws a distinction between employees, dependent contractors and independent contractors, but often employers don't make the distinction “as sharply as they should,” says Lyle.

“The independent contractor is, of course, different from independent contractor employees in that they may have a number of contracts with various employers or businesses going at the same time,” she says. “A dependent contractor is someone who works primarily for one employer and has a large part of their income reliant on that one employer. In this case, it's a contract for services, essentially.”

And the court tries to provide a lot of protection to employees and dependent contractors, says Lyle, because these are people who often have a closer relationship with their employer and are financially dependent on that employer.

“It's always important for employers and businesses to figure out whether they're creating a relationship of dependency or an employment relationship in any of the contracts that they're entering into for services, because the obligations are going to be different.”

One other note: This case involved a 72-month fixed-term agreement, which is quite long, according to Fusco.

“It is, I would say, a bit risky to engage in a lengthier contract, because eventually there could be a challenge to it of a misclassification if the independent contractor resembles more of an employee rather than an actual independent contractor.”

The duty to mitigate and independent contractors

Of course, the case is also helpful in reminding employers and HR about the expectations around a duty to mitigate.

The court found that Metro was unable to demonstrate that Monterosso hadn't mitigated, says Fusco.

“It's a useful reminder for employers that they're going to have the obligation and the burden to demonstrate that the individual has failed to mitigate… it's going to be important that they're going to have to lead evidence of inadequate mitigation efforts and work opportunities that are available to that contractor. So that burden is always going to be on the employer.”

A failure to lead any evidence “will preclude a reduction in damages for failure to mitigate,” she says.

Whether there's a duty to mitigate is an issue that should be discussed with counsel, says Lyle, looking at “is there an expectation that in the event that the contract is terminated before the end of its natural life, that you're expecting that the contractor is going to go out and get other work to replace it?”

While the court doesn't want people “to sit back and make no efforts and just get the paycheck that they were waiting for, it's a longstanding principle in contract law that you should try to mitigate your damages,” she says.

“In my experience, it’s a pretty high burden for a business and employer to succeed on that argument as long as [the employee has] done something.”

Lyle recommends that people keep a diary to show what efforts they’re making to find a job.

“It's really hard for a judge to second guess what jobs somebody should and should not be applying for. I mean, there are many factors. So it has to be reasonable, it has to be comparable. So the courts want to see someone's understanding their obligation, but they’re not going to be telling them how to go out and how to do it.”