Duty to mitigate in wrongful dismissals, Law Times, Issue No. 31 at 7, (October 4, 2010)

The duty to mitigate arises in almost every wrongful dismissal case. The so-called “duty” is not a duty in the strict legal sense, because a breach of it is not actionable. The reference in the case law to the duty to mitigate derives from the general proposition, rooted in contract law, that a wronged plaintiff cannot recover damages for reasonably avoidable economic loss. Thus, in wrongful dismissal cases it is incumbent on the terminated employee to reduce the damages payable to him by taking reasonable steps to secure comparable, alternate employment. The duty to mitigate is not one owed by the dismissed employee to the defaulting former employer. Rather it is one the employee owes to himself, having regard to his own interests and not that of the former employer. The onus rests upon the employer to prove not only failure to take steps to mitigate, but also that, had the employee taken reasonable steps he would likely have obtained comparable employment. Any gap in the evidence accrues to the terminated employee’s benefit. However, should the court find a failure on the employee’s part to mitigate, it may deduct from the award of damages for pay in lieu of notice an amount it considers the employee should have earned. This article reviews the terminated employee’s obligation to mitigate in the context of several employment scenarios.

Wrongful Dismissal occurs when an employee’s employment is terminated on inadequate notice or pay in lieu thereof. Subject to the terms of the contract of employment, the termination triggers the employee’s duty to mitigate. Michaels v. Red Deer College, [1976] 2 S.C.R. 324 is the leading Canadian decision on the duty to mitigate. The vexing question is whether the dismissed employee is entitled to use the reasonable notice period to seek a position commensurate with his level of experience and skills or is he obligated to accept a lesser paying position to reduce his economic loss? In Chann v. RBC Dominion Securities Inc., 2004 CarswellOnt 3341 (OSCJ), the court found an Investment Banker was not obligated to seek a lesser paying generalist position in another investment banking firm until he had completed a reasonable search for comparable employment. The court added, the employee was “entitled to use the reasonable notice period to seek a position commensurate with his level of expertise and skills”. The Chann rationale folds perfectly into the British Columbia Court of Appeal’s position in Forshaw v. Aluminex Extrusions Ltd., 1989 CarswellBC 153 (BCCA), where the court aptly noted that the duty to mitigate is: “… a duty to take such steps as a reasonable person in the dismissed employee’s position would take in his own interests – to maintain his income and his position in his industry, trade or profession.”

But how does an employee’s new and higher paying employment, secured in mitigation, impact on damages the former employer is required to pay? There are conflicting lines of cases: (1) the entire amount earned at the new job must be deducted; and (2) damages stop, and the employer does not get a credit for higher level income.

Constructive Dismissal occurs when an employer unilaterally makes substantial changes to the essential terms of an employment contract, thereby giving an employee a right to treat the contract as being at an end. Given that both wrongful dismissal and constructive dismissal are characterized by employer-imposed termination of the employment contract, there is no principled reason to distinguish between them when evaluating the need to mitigate. The question whether it is reasonable for an employee to mitigate a constructive dismissal by accepting re-employment in a demoted position, with no immediate change in compensation, is a recurring source of uncertainty. Some appellate courts have held that an employee may have an obligation to continue working for the employer (Mifsud v. MacMillan Bathurst Inc., 1989 CarswellOnt 770 (ONCA)). While others have found that an obligation to continue working for the employer will arise only in a situation of mutual understanding and respect and where neither the employer nor the employee is likely to put the other’s interests in jeopardy (Farquhar v. Butler Brothers Suppliers Ltd., 1988 CarswellBC 46 (BCCA)).

For example, in Galbraith v. Acres International Ltd., 2002 CarswellOnt 3061 (ONCA), the Ontario Court of Appeal affirmed the trial judge’s finding that the employee was under no obligation to mitigate his constructive dismissal by accepting a demotion from Chief Financial Officer to Treasurer and Corporate Secretary with the same salary, because it was demeaning to him. Similarly, in Wilding v. Qwest Foods Ltd., 1994 CarswellBC 295 (BCCA), the British Columbia Court of Appeal found a General Sales Manager did not have to accept a Sales Representative position with no change in salary, because he would have suffered a substantial loss of prestige and authority with consequent embarrassment.

A common thread running through decisions in this category suggests that constructively dismissed employees are not obligated to accept re-employment in a demoted position to satisfy their mitigation obligation if the basis of trust, good faith and sincerity are gone from the employment relationship.

Fixed Term Contracts frequently raise a question whether the terminated employee is obligated to take reasonable steps to mitigate his damages. In Sinclair v. Canadian Ice Machine Co., [1955] S.C.R. 777, the Supreme Court of Canada held that where the fixed-term contract makes no mention of the amount of damages payable to the dismissed employee, the employee must still attempt to mitigate his economic losses. More recently, in Graham v. Mareleau, Lemire Securities Inc., 2000 CarswellOnt 333 (OSCJ), Justice Nordheimer concluded: “whether a contract is a fixed term contract or a contract of indefinite duration, the principle of mitigation applies to a claim arising from any breach of that contract”.

A non-competition clause in an employment contract raises an intriguing question whether the existence of the restrictive covenant relieves a dismissed employee from his duty to mitigate. In 2010, the Ontario Court of Appeal affirmed the trial judge’s finding in Link v. Venture Steel Inc., 2010 CarswellOnt 1049 (ONCA) that the existence of a non- competition obligation would not, as a matter of course, completely relieve a dismissed employee from his legal duty to mitigate. The trial’s judge opined: “the existence of obligations contained in a restrictive covenant ought to only be a factor in considering the reasonableness of the dismissed employee’s efforts”. In Link, the restrictive covenant did not seek to prohibit the plaintiff, Vice-President of Sales, from working in the steel business, but only from the specific area within that business.

The caselaw makes it clear that it will always be a question of fact and personal circumstances, and not law, which determine the terminated employee’s obligation to mitigate. The employee’s decision not to mitigate will be judged on the standard of “reasonableness” not “perfection”. The burden which lies on the employer of proving that the employee has failed in his duty to mitigate is by no means a light one.