Contractually set severance payments can remove dismissed worker’s duty to mitigate damages by looking for another job
No hurry with guaranteed severance?
Damages in wrongful dismissal awards are generally meant to serve as compensation in lieu of the reasonable notice that a wrongfully dismissed employee should have received. The notice period is supposed to serve as a bridge between jobs and provide the employee with an opportunity to find a new job without too much financial hardship. In order to receive these damages, the employee must show she has made a reasonable effort to find work after the dismissal and if she finds a job before the notice period is up, often the employer will be off the hook for the balance of damages in lieu of notice. However, things become a little more complicated if the employee has a contract that guarantees a specific amount of severance pay. Does the employee have to look for work right away if the employer has contractually guaranteed a specific amount in lieu of notice? On the flip side, if the employee does find work quickly, is the employer bound to the amount in lieu of notice specified in the contract?
Employment lawyer Nikolay Chsherbinin of Grosman Grosman and Gale LLP examines the intricacies of contractually guaranteed severance payment and the duty to mitigate.
As a general rule, dismissed employees have a duty to take reasonable steps to reduce, or mitigate, their loss by looking for a new job within a reasonable period of time. If an employment contract provides for a severance payment upon termination, the question becomes whether the employee is still obligated to mitigate her loss. Recently, the Ontario Court of Appeal touched on this issue in Soye v. Corinthian Colleges Inc. and Wronko v. Western Inventory Services. The court ultimately concluded when the employment contract expressly provides for a severance payout upon termination, it relieves the employee of a duty to mitigate her loss.
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, of which Soye was one. 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. 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.”
The decision is, however, silent on how the court arrived at his 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.
Short deadline for severance payment waived mitigation obligation
In Wronko, Darrel Wronko was employed at Western Inventory as the vice-president of national accounts and marketing. His employment contract included a severance provision that provided for the payment of two years’ salary in the event 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, which required Western Inventory to pay him 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 (Wronko) to mitigate,” said the court.
Similar issues have come before the courts in Western Canada. The Alberta Court of Appeal in Mills v. Alberta established that, in cases where an employment contract contemplates a specific payment of salary in lieu of notice upon termination, the 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 these Western jurisdictions is that the duty to mitigate does not arise whenever an employment contract obligates the employer to make a lump sum payment of severance immediately, or very shortly, after termination.
When is there no duty to mitigate?
While Soye and Wronko certainly clarify 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 the employee is subject to the duty to mitigate. At present, courts will likely find the employee is not subject to mitigation in the following circumstances:
•An employment contract provides for a lump sum payment on termination (Soye; Wells v. Contestoga Meat Packers Limited).
•The contractual provision provides that the severance amount is payable immediately at, or very shortly after, the time of the termination.
•The 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 the termination provision contains an express obligation to continue to make the payment under the employment contract (Paquin v. Gainers Inc.).
•Where the employer’s policy provides that the employee is relieved of the duty to mitigate at the event of termination (Jardine v. Gloucester (City)).
•Where the termination provision provides a choice between advance notice or a lump sum but no advance notice was provided (Orr v. Magna Entertainment Corp.).
•Where the severance provision contains an express waiver of the duty to mitigate (Neilson v. Vancouver Hockey Club Ltd.).
Soye and Wronko serve as a useful reminder that the disposition of any mitigation-related dispute would turn on the court’s scrutiny of the language of the severance provision. 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 the 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 (Ont. C.A.).
•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. Contestoga 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 Y. Chsherbinin is an employment lawyer at Grosman, Grosman and Gale LLP in Toronto. He can be reached at (416) 364-9599 or [email protected]