If an employee has a valid, enforceable employment agreement, with a specific severance term – does the employer still have to pay the whole amount even if the employee finds work quickly?

This questions was answered recently by the Ontario Court of Appeal in the case of Bowes v. Goss Power Products Ltd., a decision issues on June 21, 2012.

Peter Bowes had a written employment agreement with his employer.  The contract stated that he would receive six months’ notice or pay in lieu of notice if his employment was terminated without cause “prior to the completion of forty-eight (48) months from commencement.”  The contract said nothing about mitigation or about timing of the payment.

Mr. Bowes was dismissed without cause and he was able to find new employment after only two weeks.  His employer paid him out three weeks’ notice as required under the Ontario Employment Standards Act, but then refused to pay out the rest of the amount specified in the employment agreement.  Mr. Bowes was forced to file a lawsuit.  He was unsuccessful initially and then appealed his case to the Ontario Court of Appeal.

The Court of Appeal reviewed the case law dealing with mitigation of damages in these circumstances.  It emphasized that an employer and employee can fix an enforceable notice period which provides some certainty to both parties.  It may well be a lower amount than the employee would have otherwise been entitled to receive under common law.  However, by doing so, the employer gives up the right to the benefit of mitigation if the employee successfully mitigates damages.

In particular, the Court of Appeal stated the following, quite emphatically:

1.  “A fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice.” and

2.  Payment in lieu of a fixed term of notice, being liquidated damages or a contractual amount is not subject to a duty to mitigate;

The Court of Appeal stated that it is unfair of an employer to draft an employment agreement with a set severance term, that is less than the employee might have had under the common law, and then try to get out of it at the point of dismissal by informing the employee “that future earnings will be deducted from the fixed amount.”

The Court decision, written by Chief Justice Winkler, on behalf of a unanimous Court of Appeal, concludes:

“Where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.”

In the present case, Mr. Bowes was awarded the full six months’ pay, as specified in employment contract, despite the fact that he found other work quickly.

This is a very important decision for Ontario employees as it clarifies an area in which there had been mixed case law.  The Ontario Court of Appeal has stated very clearly that employers must pay out fixed contractual severance amounts, even if the dismissed employee finds new employment quickly – unless the employment agreement very clearly states otherwise.

Employers can still use contracts that include mitigation provisions but these provisions must be included in the original employment agreement and must meet all of the other normal conditions of enforceability.