Fired employees are not obligated to mitigate employerís losses

Suppose you are fired without cause and receive a severance package as per your contract. Are you obliged to find another job as quickly as possible and forego severance payments in order to reduce costs for your former employer? In a somewhat surprising, albeit unanimous decision, the Ontario Court of Appeal held that there is no such responsibility.

The recent decision ó Bowes v Goss Power Products Ltd (2012) ó has held that an employee who is fired without cause and is contractually entitled to a fixed severance is not required to find another job in order to mitigate his or her employer's losses ó unless the employment contract specifically says so. Absent clear language, then, an employer cannot deduct from the fired employee's severance pay the income he or she has earned in other employment during the notice period.

As you might imagine, Bowes has shaken the employment environment in Canada. Usually, under common law, contractual agreements entail an obligation to mitigate any damages arising from some facet of non-performance, even if it is the fault of the other side.

Say, for example, you own a butcher shop and you order 15 refrigeration units from company X Ltd. You and X agree that X will deliver the units to your shop door on Monday morning at 10 a.m., before you receive a big shipment of meat later that day. Unfortunately, X has a problem and, on Thursday, phones to tell you it won't be making next Monday's delivery. Under the law, any losses ófrom meat being unrefrigerated and going bad to lost sales ó can essentially be billed to company X, but you have to mitigate your losses. When X calls on Thursday, you can't just sit in your office and throw your hands in the air boiling with rage. You must contact another supplier and try to lessen the damages however reasonably possible.

Now, Bowes demonstrates how the common law of contract has evolved in the employment sphere. Increased social consciousness, human rights and workers' rights movements, and legislation have all contributed to judgments in the past two decades that attempt to level the playing field in the employment-contract arena. This should be heralded, as employees are certainly more valuable and respectable than appliances, but rulings such as these can be tough to swallow, affecting both employers and the common law system. Legislative changes can amend this ruling at any time, however.

The genesis of this case involved a civil suit that Bowes filed against his former employer, Goss Power. The senior sales executive was fired from his job without cause and his contract stipulated six-months severance. Three weeks later Bowes found a new job with similar pay. For that reason, Goss Power refused to pay Bowes his severance.

The lower court judge found in favour of Goss Power, citing Graham v Marleau, a case that most considered "settled lawî on this subject. But the Court of Appeal disagreed. It reasoned that, when an employment agreement contains a stipulated entitlement on termination without cause, the amount in question is either liquidated damages or a contractual sum. "Either way,î said Justice Warren Winkler, "mitigation is irrelevant.î

Employers across Canada are taking note of this decision. But they should proceed carefully: a mitigation clause cannot simply be added to an existing contract without the employee's consent and new consideration (payment). But you can bet amendments to future contract templates are underway across the country.