Can self-employment be considered mitigation?

Exclusive to Canadian HR Reporter from Rudner Law.

Is a wrongful dismissal an opportunity to start your own business? Like many things in law, the answer appears to vary between “it depends” and “it is not clear”.

However, by taking the right things into consideration beforehand and taking the right steps, it might be possible without negatively impacting a wrongful dismissal claim.

The duty to mitigate requires a wrongfully dismissed employee to look for and accept suitable employment to reduce the losses resulting from their dismissal. Not doing so can result in a court reducing the duration of an employee’s awarded notice period.

As employment lawyers, we frequently encounter individuals who want to start their own business instead of job searching, and consult with us to determine what impact, if any, this will have on their case. A review of the recent history of the court’s assessment of the matter shows the factors it will take into account in assessing whether starting a new business was a failure to mitigate.

The starting point: self-employment is second best

In the 2000 case Allan v. Westinghouse Canada Inc., [2000] O.J. No. 5054 (QL) (S.C.J.)., Justice Whitten noted that:

“Self-employment is problematic as ... far as being an effort to mitigate, because of the invariable start up costs. The entrepreneur is unlikely to earn the income that he or she earned at termination until the enterprise becomes established. Salaried positions, in contrast, make for more immediate earnings. Consequently, self-employment is viewed as a last resort rather than a first line of attack on the loss of income resulting from termination.”

In other words, the court views self-employment as the second best option for an employee to mitigate their losses. This finding may lead to a reduction in the notice period the court awards. This makes sense in the context of the duty to mitigate: mitigation income is meant to replace the lost income.

Self employment may mean a period of time without income while the business gets running - and may even require an infusion of capital to get started.

Justice Whitten’s statement does not appear to be a shared view. In another 2000 case, Bradley v. Brains II, Inc., 2000 BCSC 1629, this one in BC, the court found that an employee immediately starting his own business did not fail to mitigate, as it was reasonable for him to start up a business to work into retirement.

 In a 2001 Court of Appeal of Ontario case, Peet v. Babcock & Wilcox Industries Ltd., 2001 CanLII 24077 (ON CA), the court accepted that setting up a consulting business was proper mitigation, despite the fact that the plaintiff had yet to turn a profit at the time of trial.

Development of the concept

In 2005, the Ontario Superior Court of Justice found that an individual who could have easily obtained a comparable role at any time failed to mitigate by choosing to start and carry on his own business (operating at a loss throughout). In 2008, a decision of the British Columbia Supreme Court found that an individual who switched careers and went into business for themselves failed to mitigate their losses.

In both of these cases, the defendant showed that the plaintiff would likely have been successful had they applied for jobs in their field and that their continued lack of income was their own fault for choosing to attempt to make their own way. This concept is in line with the court’s findings regarding suitable positions for mitigation - that an employee should not see a dismissal as an opportunity to switch career paths.

For example, the British Columbia Supreme Court found that an individual with 35 years’ experience as a flight attendant failed to mitigate her losses by choosing (unsuccessfully) to start a new career (read our article about this case).

The determining factor appears to be whether the individual’s decision was reasonable. The Superior Court of Justice for Ontario addressed the matter in the 2015 case of Leeming v. IBM Canada Ltd. Here, after an unsuccessful job search, the individual started a marketing business, a field in which she had no experience or training. The court did not deem this to be a failure to mitigate.

In a later case where the individual opened up a restaurant or started a roofing business, it was not a failure to mitigate.

This case suggests that the rule with self-employment is that it is a legitimate path to mitigation only after an unsuccessful job search. This is in keeping with Justice Whitten's holding in 2000. In other words, if you can't find a job, it's fine to open up a business. Put another way, it may not be seen as reasonable to forego legitimate job opportunities in order to start a business.

Takeaways for employers

The court appears to have softened its position regarding self-employment since Justice Whitten’s pronouncement on the subject in 2000, and self-employment is not always going to be seen as a negative. While it is not always going to be an entirely viable option, there are some steps that an employee may take to lessen the chances that their decision set out on their own does not impact their litigation. These include:

1. Starting a business that is closely related to your job experience; and
2. Starting the business after a genuine job search.

Finally, it appears that the individual’s age is going to be a factor: the closer they are to retirement, the more plausible it is to set up a business to be a bridge to retirement.

Starting over after a dismissal is not necessarily a failure to mitigate - but anyone who tries needs to have considered their options - and the potential implication of their decision.

Geoffrey Low is an associate at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].