Employment Contracts and the Duty to Mitigate

Employment Contracts and the Duty to Mitigate

June 22, 2021

By Brian Babcock

Failing to deal with the obligation to mitigate damages in an employment contract may result in a windfall to an employee.

In Barry Gula v. Freed Developments Ltd. the employee signed a written contract of employment for an indefinite term. The contract provided a formula to calculate the employee’s entitlements on termination. It made no reference to mitigation – the obligation that an employee usually has to at least try to find other work. Usually, if the employee finds other work, that replacement income reduces the former employer’s obligations.

The employee was terminated. The contractual formula suggested that he was entitled to 11 months pay in lieu of notice, plus other amounts. Except the employee found other work almost immediately, with the help of the former employer. On that basis, the employer did not pay the full 11 months. It simply paid the minimum amounts required under the Employment Standards Act.

So it must have really stung the employer when the judge ruled that the usual obligation to mitigate did not apply, and the employee was entitled to the full 11 months pay plus other amounts. The judge decided that the formula in the contract displaced the usual obligation. Because the employer had drafted the contract, so could have included reference to mitigation if they expected it to apply, the contract should be interpreted favour of the employee. So it was not necessary to explicitly contract out of the duty to mitigate.

This decision applies an earlier Court of Appeal decision, so though it might be surprising, it is not unique, and might well stand up on appeal. Two additional more recent Court of Appeal decisions also favoured the employee in somewhat similar situations.

This decision stands as fair warning to employers that in drafting employment contracts, failure to deal with the duty to mitigate may result in having to pay the employee more than expected if they find other work. That may be a windfall to the employee, but is consistent with the trend of Ontario courts to favour employees in deciding wrongful dismissal cases.

Because employers are in a better position to protect themselves at the time of hiring, care must be taken by the employer to prepare a complete and legally compliant contract. Where the circumstances are unusual, the amount in issue may be significant, or simply if you lack the expertise to draft a legal contract, hiring an employment lawyer to draft your contract is a smart move that may save you money in the long run.

On the other hand, the case offers employees a reminder that at the time of dismissal, a written contract may give them different rights and obligations than otherwise provided in law. Because the law of wrongful dismissal is increasingly complex, in almost every situation, seeking legal advice before settling with the former employer is a sound investment. In many cases, the employer will even agree to pay the reasonable cost of legal advice, to increase the odds that a settlement will be binding, even if the employee later feels that their rights were not protected.