Does an employee operating under a fixed-term employment contract have a duty to mitigate his or her damages upon termination? This question has caused much debate. Prior to the decision in Bowes v. Goss Power Products Ltd. it was generally held that employees operating under either a fixed-term employment contract or an indefinite-term employment contract had a duty to mitigate his or her damages upon termination. However, in Bowes, decided in 2012, the Ontario Court of Appeal made comments suggesting this was not always the case.
Before delving into the decision in Bowes, it is helpful to clarify the difference between a fixed-term employment contract and an employment contract that contains a fixed notice payment. A fixed-term contract stipulates the length of time the contract will last for. As an example: “X employee will be employed by Y Corporation for a period of three years”. A contract containing a fixed notice payment will stipulate the amount of notice the employee will receive upon termination without cause. As an example: “Upon termination of employment without notice, Y Corporation will pay X employee five months’ notice”.
In Bowes, the court held that employees operating under a contract containing a fixed notice payment do not have a duty to mitigate their damages. Rather, mitigation is a live issue only where damages are “at large”. Damages are at large where such damages are difficult to quantify. The court will usually assess such damages on the basis of what might have been reasonable. Mitigation is not applicable if the damages are liquidated or a contractual sum, which means a quantifiable amount designated within the contract. As a result of the finding in Bowes, the employment law world was left unsure as to whether the duty to mitigate applied to fixed-term contracts in general.
The law was recently clarified in the April 8, 2016 decision from the Ontario Court of Appeal, Howard v. Benson Group Inc. The appellant, John Howard (“Howard”), was employed as a Sales Development Manager. His employment contract was for a five year term, commencing in September 2012. However, on July 28, 2014, just 23 months into the employment contract, the appellant was terminated by the respondent employer Benson Group Inc., (“Benson Group”).
On the motion, the issue was whether Howard had an obligation to mitigate his damages for the duration of the five year contract. The motion judge held that, in the absence of an enforceable early termination clause, Benson Group’s obligations to Howard were governed by the principles of the common law. Since common law notice applied, so did the duty to mitigate.
Howard appealed to the Court of Appeal on two grounds. For our purposes, we will focus on issue number two: whether an award of damages for early termination of the employment contract was subject to the duty to mitigate.
Speaking for the Court of Appeal, Miller J.A. cited the Bowes decision, which held that there is no obligation to mitigate contractual or liquidated damages. However, Miller J.A. took it one step further, where he stated,
“In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation”.
The Court of Appeal in Howard v. Benson Group Inc. has changed the law. For mitigation purposes, there is now no difference between a contract that provides for a specific contractual notice payment upon termination, or a contract that is fixed in duration. In each case, an employee will not have a duty to mitigate his or her damages upon termination of employment.
Takeaway
Howard v. Benson Group Inc. has cleared up an uncertain area of the law. The Court of Appeal’s decision will drastically alter how employers go about drafting employment contracts. For employers who still wish to operate employment relationships pursuant to fixed-term contracts of employment, we make two recommendations regarding such contracts:
- Include an early termination clause; and,
- Include a clause which expressly states that an employee has a duty to mitigate their damages upon termination.
An employer who drafts a fixed-term contract of employment without including either of the two clauses above will find it awfully expensive to terminate an employee before the expiration of such contract.