To mitigate or not to mitigate

Exclusive to Canadian HR Reporter from Rudner Law.

In a recent Ontario decision, Giduturi v LG Electronics Canada, the court found that an employee did not fail to mitigate his damages when he rejected an offer of employment from the acquiring company. He was awarded 12 months of notice at common law.

This case addresses a common situation: a company is acquired by another, and the acquiring company offers to continue employing some or all of the existing employees. What happens if some of those employees reject the offer?

In order to understand the implications of this decision, it is important to understand the law of dismissals as well as the implications of an asset purchase transaction on an employer’s obligations.

The law of dismissals and duty to mitigate

The law of dismissals in Canada is quite complicated for employers and employees alike. When an employee is let go, the employer must generally keep them ‘whole’ - that is, the employer is expected to continue to pay what the employee would have earned had they remained employed - for a reasonable notice period, absent an enforceable employment agreement limiting the employee’s entitlements upon termination.

While an employer is responsible for keeping an employee whole, an employee cannot remain idle and simply collect the payment. Employees are responsible for mitigating their losses by making reasonable efforts to find new work. If they don’t, and if the former employer can demonstrate that if they had done so, they would have found new employment, then a court is likely to reduce their entitlement to severance.

In the scenario described above, it is not speculation to say that the employee could have found new work: there is evidence that they were offered a job with the acquiring company. So does that mean that turning down such employment will automatically reduce their severance? As we often say, “it depends”.

Asset purchase and employment law

When a business acquires another company through a share purchase, the employer does not change and the purchaser effectively steps into the shoes of the vendor. Put simply, the purchaser inherits the employment-related liabilities of the vendor, and all existing employment relationships simply continue.

On the other hand, in an asset purchase, the purchaser does not step into the shoes of the vendor; they remain a separate legal entity. They may offer employment to all, some or none of the vendor’s employees. In the event the purchaser does not offer employment to the vendor’s employees, these employees will be either terminated from their employment by operation of law on closing, or they will remain employees of the vendor if the vendor continues to operate as a going concern.

Employee sues for wrongful dismissal

In Giduturi v LG Electronics Canada, the employee was a 49-year-old warehouse worker with over 13 years of service. His employer decided to outsource its warehouse operations to another company named Pantos; as is often the case, it was agreed between the companies that the employee would be offered comparable employment and his seniority would be recognized.

Instead, Pantos’ offer of employment indicated that his employment would be “at will” (a concept not recognized or accepted in Canadian employment law), that he would have to start paying for benefits, and that he would receive less paid time off.

The employee refused Pantos’ offer of reemployment and Pantos ended up filling the position. After the employee rejected Pantos’ offer, his employment was terminated.

The employee sued for wrongful dismissal damages and sought a 14-month notice period - that is how long it took him to find a new job. The employer argued that by failing to accept the offer of employment with the new company, the employee had failed to mitigate his damages. Further, they argued that the notice period should be no more than nine months.

The court held that the employee’s failure to accept Pantos’ offer was not a failure to mitigate because 1) it was not comparable (he was offered less compensation), and 2) the offer of alternative employment was made and rejected prior to the termination. The court stated: “By the time his termination was effected … he was not able to mitigate his damages by reconsidering and accepting it.”

The court awarded the employee 12 months of notice.

Key takeaways for employers

Employers should be careful during dismissals in general, and during asset purchase transactions in particular. Employers may be exposed to substantial liability if they are not careful regarding when and how offers of reemployment and terminations are implemented.

In particular, offers of reemployment should be substantially similar to the employee’s terms of employment at the time of the sale, and employment should be offered or at least clearly open for acceptance after the termination has taken place.

As a final note, it is not unusual for the buying and selling companies to negotiate some sort of agreement regarding who will be responsible for termination costs if some employees are not offered, or do not accept, re-employment; we often work with companies to put those agreements, and proper employment agreements, in place.

Nadia Zaman is a senior associate at Rudner Law in Toronto. She can be reached at (416) 864-8500 or [email protected].