Dismissal, Mitigation and Termination Clauses

Typical employment agreements contain the implication that an employer must provide reasonable notice to an employee prior to dismissal. If the employer doesn't provide the correct notice, they breach the contract and the employee is entitled to damages. The employee is then required by law to mitigate (or lessen) his or her damages by seeking an alternate source of employment. Any income earned in the notice period from alternate employment is to be deducted from the damages awarded. This is common employment law, but can be displaced by a termination clause.

Termination clauses are becoming more popular with companies that wish to avoid legal battles over wrongful dismissal or constructive dismissal. Termination clauses provide certainty and a guaranteed entitlement for employees, regardless of how their dismissal occurred. But, what about mitigation? Is the employee still obligated to mitigate his or her damages?

Wrongful dismissal case avoided by a severance provision

Recent changes have been made to the employment laws in Canada regarding termination clauses. One case involves an employee who was dismissed after 3 1/2 years of service without notice or cause. Normally, this would have been viewed as wrongful dismissal if it weren’t for the termination clause in his contract. The clause stated that if he was dismissed without notice or cause, he would be compensated with full salary continuance for six months. Under the common law doctrine of mitigation, he was also required to look for alternate employment in that time.

The employee found another job within two weeks of his dismissal and notified his previous employer as requested. The employer believed they were no longer required to continue paying his full salary. They cut his compensation to three weeks and paid the minimum amount required under the Employment Standards Act.

Common law damages vs. dismissal with a termination clause

As the contract had no specific mention of mitigating losses, the employee felt he was owed six months compensation at full salary and brought an application for trial for determination of rights of his employment contract. The trial judge stated that employees with fixed severance contracts were automatically required to mitigate their losses after dismissal unless the agreement specifically stated otherwise.

The employee appealed and was successful in reversing the decision. The trial judge made the mistake of believing that a contractually fixed term of notice was the same as common law reasonable notice. When an employee and employer agree on a fixed severance clause they are opting out of the typical common law and reasonable notice contract and creating their own contract, with its own set of rules.

Details of the employment contract must be upheld

What this means is that the employee is entitled to the full fixed amount of damages according to the contract. The other common law applications regarding release forms and mitigation don't apply either. Employees with such contracts don’t have to sign a release to receive their severance pay and they aren’t required to mitigate their losses unless specifically stated in the contract.

If you have questions about your own dismissal or are concerned about your employment contract, please contact Yeager Employment Law or fill our our termination questionnaire.

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