Employee finding new employment before contractual notice is paid out
Question: An employee has a contract that requires 12 months’ notice for termination without cause. Is the company required to continue paying the employee during this notice period if the employee finds other employment quickly? Can a clause be added to the termination provision which states that payment will stop if alternative employment is found before the end of the notice period?
Answer: The law is not entirely clear on the first issue, but over the last few years there have been a number of court decisions finding that there is a duty on the employee to mitigate contractual notice, and the employee’s success in finding other employment can diminish the employer’s liability. Nonetheless, express words in the contract to that effect removes any continuing ambiguity and ensures that employees do not receive a “windfall.”
In Graham v. Marleau, Lemire Securities Inc., the Ontario Superior Court concluded that where there is an agreed-upon severance provision, the principle of mitigation still applies.
“I see no reason why there should be any distinction drawn between contracts of employment where the notice period is not stipulated and those where it is with the result that there would be a duty to mitigate the former but not the latter,” said the court. “If that were the case, it would seem to be an unfair result for the employer simply because the parties tried to agree in advance on the proper notice and thereby eliminate that as an issue in the event of a dismissal — subject of course to the court’s overriding right to determine the reasonableness of such an agreement in any given case.”
The court, however, tempered this conclusion by saying that if there is an express or implied exemption from mitigation, employee mitigation is not required. It set out the exceptions as:
•An express waiver of the duty to mitigate
•An express obligation to continue to make the payments under the employment contract
•Where the contractual provisions provide that severance is payable immediately.
There is an obvious practical issue in determining mitigation prospects at date of termination. A recent Ontario Superior Court decision, Bowes v. Goss Power Products Ltd., dealt with the issue. An employee was dismissed without cause on April 13, 2011, but started new employment 12 days later. The court confirmed that contractual notice is subject to mitigation principles, saying that the desire for certainty when entering a contract does not mean that the parties agreed to waive the obligation to mitigate. Further, the court commented that if there is nothing in the agreement entitling a lump sum, then periodic salary payments are permitted. The latter lends itself to an expectation of mitigation and an ability to enforce it.
The Alberta Court of Appeal has also confirmed that mitigation applies to employment contracts which set out a notice period on termination, in Brown v. Pronghorn Controls Ltd. Most recently, in Gjema v. Mercury Specialty Products Inc., the Manitoba Court of Queen’s Bench also agreed with Graham.
Regardless of the direction courts are taking, if an employer is offering a substantial amount of notice (such as 12 months) by way of contract, it is probably likely that the employee will secure alternate employment during that notice period. Therefore, inserting a duty to mitigate into the employment contract is an effective way to limit employee liability.
For more information see:
•Graham v. Marleau, Lemire Securities Inc., 2000 CarswellOnt 333 (Ont. S.C.J.).
•Bowes v. Goss Power Products Ltd., 2011 CarswellOnt 7221 (Ont. S.C.J.).
•Brown v. Pronghorn Controls Ltd., 2011 CarswellAlta 1933 (Alta. C.A.).
•Gjema v. Mercury Specialty Products Inc., 2012 CarswellMan 126 (Man. Q.B.).
