Entrepreneurship as mitigation?

Exclusive to Canadian HR Reporter from Rudner Law.

Dismissal creates reciprocal obligations: in many cases, the employer must provide reasonable notice or pay in lieu of notice to a dismissed employee. The employee must make reasonable efforts to mitigate their losses by seeking similar employment.

If the employer can demonstrate that the employee has failed to fulfill the duty to mitigate, it can result in a court reducing the employee's notice entitlement.

One way an employer can do this is by asserting that the employee did not take every reasonable step towards mitigating their losses.

For example, the court may deem it a failure to mitigate where an employee chooses to retrain for a new role, to look for a job outside of their field, or even move to a remote location.

What about an employee who chooses not to look for similar employment but instead decides to start their own business? Will the court view this as the employee failing to make reasonable efforts to mitigate, or will this be enough? If starting a business is mitigation, how far from the employee's expertise can this new business be before it becomes a failure to mitigate?

In Cressey Construction Corporation v. Parolin, the Court of Appeal for British Columbia confirmed not only that starting a business is mitigation, but that this business can be well outside of the employee's field of expertise and still fulfill the duty to mitigate.

Constructive dismissal

In May 2023, Tracy Parolin, then Cressey’s director of marketing, met with Cressey’s vice president of development for a salary review. In addition to advising Parolin that she would receive a smaller-than-expected raise, the VP also advised that she would be expected to return to work in the office. Parolin resigned, asserted constructive dismissal, and sued for wrongful dismissal.

Parolin did not look for another position following her departure and instead started three successive businesses:

• Sova Homes, a residential property development company
• Maro Design, whose business idea was to develop an AI-based interior design product
• Tech Safe Kids, an interactive learning platform for young people designed to teach cell phone e-safety, digital etiquette and online security with an emphasis on mental health. 

The first two were unsuccessful; the third was moderately successful by the time of trial. All three businesses were outside of Parolin’s specific area of expertise, but involved a significant time commitment on her part (between 40 and 60 hours weekly).

At trial, the court found that Cressey had constructively dismissed Parolin by mandating that she return to the office and awarded her a 19-month notice period.

Cressey asserted that Parolin had failed in her duty to mitigate. In support of this position, Cressey asserted that there were multiple opportunities available to Parolin, submitting two job openings with their competitors as proof.

Opening businesses not failure to mitigate

Cressey also asserted that Parolin’s decision to open businesses rather than seek employment was a failure to mitigate.

The court did not accept Cressey’s arguments. The positions with Cressey’s competitors were not suitable as alternative jobs as both mandated in-office work. The court also found that Parolin’s decision to start a business rather than seek comparable employment was reasonable.

Cressey appealed, asserting among other grounds of appeal, that the court had erred in finding that Parolin had not failed to mitigate.

On appeal, the court noted that while Parolin’s first two ventures were somewhat outside her areas of expertise, these nevertheless required her to apply her professional experience. The third business was well outside Parolin’s experience, but she had partnered with an expert in the field and applied her general business knowledge.

The court also noted that Parolin had devoted a great deal of time to all three businesses, working between 40 to 60 hours a week consistently from the time of her dismissal.

Parolin’s limited income from these businesses also did not mean that she had failed to mitigate. The court, citing a decision from the Court of Appeal for Ontario, noted that an employee is entitled to consider their long-term interests when earning a living, and a lack of income in the short term did not mean a failure to mitigate.

In upholding the lower court’s decision, the Court of Appeal found that Cressey had failed to demonstrate that the positions it submitted were mitigation opportunities, or that Parolin’s decision to open businesses rather than look for employment was a failure on her part to mitigate. 

Further clarity on mitigation

Parolin appears to expand what will constitute mitigation. Previous cases where an employee's decision to open a business was found to meet the duty to mitigate all involved the employee opening a business in their line of expertise, such as a restaurant or a consulting business. Parolin opening businesses entirely outside of her skillset appears to have been on par with an attempt to change her employment and ought to have been a failure to mitigate. Instead,  Parolin was found to have met the duty, without a reduction in notice.

How far away from the employee's field of expertise their new business is permitted to be is not clear. In Parolin, the employee's first two businesses were related to her skillset; the third was entirely new to her. Even so, the court did not find that this was a failure to mitigate. Instead, it looked at the degree to which Parolin committed herself to the new business rather than just the income generated.

Future decisions may provide more clarity or limitations on how much entrepreneurial risk an employee seeking to mitigate their losses is permitted to take. For the moment, Parolin appears to be the court telling dismissed employees with a dream of their own business to give it a shot.

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