New Guidance on Contractual Severance Payments - SorbaraLaw

Ontario Court of Appeal Provides New Guidance on Contractual Severance Payments

Labour and Employment – Michael Letourneau

The Ontario Court of Appeal recently released a decision that clarifies the law with respect to the effect of mitigation on a contractual severance payment.

Prior to this five-judge panel decision, the law in Ontario was divided as to whether a dismissed employee was entitled to receipt of a severance payment or pay in lieu of notice established in an employment contract without any deduction for income earned post-termination.

In Bowes v. Goss Power Products Ltd., the Court settled this uncertainty ruling that, where an employment contract sets out a specified notice period for termination without cause, the employee will not have a duty to mitigate his or her loss and the employer is not entitled to withhold or reduce contractual payments after the employee finds new employment. The duty to mitigate will apply to reduce the contractual severance payment where it is explicitly stated in the employment contract that such a deduction is required.

This decision will have a major impact on both existing employment agreements and the negotiation of new ones. Under existing agreements, employers who terminate without cause may be required to pay out a terminated employee’s full notice period, even if employee finds new work during the notice period.

For new agreements, employers and employees will likely be at odds in negotiating the duty to mitigate. Employers will seek to impose a mitigation clause in order to reduce the amount they ultimately pay out on termination. Employees will likely want such a clause omitted, so they know they will maximize their termination entitlements.

In the Bowes case, Mr. Bowes worked as Vice-President for Sales and Marketing for Goss Power Products Ltd. (GPP). His employment contract entitled him to six months notice, or pay in lieu, if he was terminated without cause. GPP terminated his employment, and Bowes started a new job only two weeks later. GPP then informed Bowes that, since he had new employment, they would not pay him more than the three weeks salary he was entitled to under the Employment Standards Act.

Bowes sued GPP, arguing that the company had agreed to give him six months notice, and that he should not be forced to accept less just because he had found alternate work shortly after termination. Although GPP was successful at trial, the Court of Appeal overturned the trial decision and awarded the full six months of notice pay to Bowes. In writing for the five-judge panel of the Court, Chief Justice Winkler held that a specified notice period or payment is equivalent to “liquidated damages” or a “contractual sum,” concept from commercial contracts that provide specified, fixed penalties for breaches. Since the parties agree to such payments in advance, there is no need for one party to mitigate the actual amount of the loss. The duty to mitigate applies only where the court must determine the amount of the damages as they relate to the period of reasonable notice of termination. But where the employer and employee have agreed in advance on the notice period, there is nothing left for the court to decide.

In his decision, Chief Justice Winkler held that it would be unfair to employees to allow employers to negotiate a fixed amount of notice pay, but then to pay the former employees less simply because they had found new work. This rule should apply unless the employer and employee had explicitly agreed otherwise. The Chief Justice acknowledged that the inferior bargaining power of employees and the desire to have predictability in employment contracts in order to reduce conflict and litigation after termination necessitated that employers be bound to the payment of the contractually agreed upon notice.

Employers and employees who would like to review current employment contracts or discuss a new contract can contact the lawyers in our Litigation Group for assistance.

* * This article is intended only to inform or educate. It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

 

Author: Michael Letourneau is a Lawyer at Sorbara, Schumacher, McCann LLP, one of the largest and most respected regional law firms in Ontario. Michael may be reached at (519) 741-8010 or <mletourneau@sorbaralaw.com>.   

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