The Court of Appeal’s recent ruling in Bowes v. Goss Power Products Ltd., 2012 ONCA 425, will have significant impact on employers who utilize employment agreements. A five judge panel heard the severance case which addressed an important issue in the context of an employment agreement with a fixed severance payout, namely the obligation of a terminated employee to mitigate and the ability of an employer to reduce termination payouts on such mitigation.
In this case, the employment agreement was signed in September 2007 and included a termination provision which provided for a payment of six months’ salary to Mr. Bowes at the time of his termination in April 2011. Mr. Bowes obtained new employment almost immediately earning the same salary. The employer submitted that they were only obligated to pay Mr. Bowes the amount of three weeks’ pay in lieu of notice, the minimum statutory entitlement, given his mitigation. The employment agreement termination provision was silent as to mitigation obligations of the employee or the treatment of same. The Court of Appeal disagreed with the employer, ruling that the employer could not deduct mitigation income and owed Mr. Bowes the six months’ salary that they had agreed to provide in the employment agreement.
Noteworthy, the employment agreement was silent on the issue of mitigation. This is not necessarily unusual to see in such agreements. The Court of Appeal is clear stating that any requirement to mitigate and ability of an employer to deduct mitigation income from a severance payout must be clear and explicit. Chief Justice Winkler:
“In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages. In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from the fixed amount.”
In summary, the Court of Appeal is telling employers they cannot have it both ways. The potential benefits of employment agreements for employers are still significant but one should carefully consider this ruling in the interpretation of existing agreements and drafting of future agreements to include specific mitigation obligations.