Speaker's Corner: Employees’ interests reign

There’s good news for some employees from the Ontario Court of Appeal. In Howard v. Benson Group Inc., the court ruled that employees under a fixed-term agreement generally do not have an obligation to mitigate their damages on a without-cause termination before the end of the term. Employees are generally entitled to damages for the unexpired portion of the term, and they can take that money and run without having to account for any re-employment income.

The appeal court’s decision is another example of a court’s willingness to bend the rules in favour of employees, recognizing that they are rarely on equal footing with employers when negotiating contracts, particularly in today’s tight job market. 

Howard was employed as a shop manager at Benson Group, under a contract with a five-year term.
Benson Group terminated his employment without cause after 23 months. Howard then brought an action seeking damages for breach of contract, claiming the salary and benefits he would have earned over the balance of the five-year term. Benson Group argued that he was only entitled to two weeks’ notice in accordance with the Employment Standards Act, as per the early termination clause in the agreement.

The motion judge concluded that the early termination clause was ambiguous and therefore unenforceable.  However, instead of awarding Howard damages equivalent to what he would have earned over the remainder of the five-year term (generally how it works with fixed-term agreements), the judge awarded Howard damages for common law reasonable notice.

Howard appealed the decision, raising two issues: 
1. Whether he was entitled to damages for reasonable notice or damages equal to what he would have earned over the remainder of the term; and,
2. Whether mitigation applies to an award of damages for the early termination of the contract.

On appeal, the Court of Appeal held that an invalid early termination clause does not displace the general rule that an employee terminated before the end of a fixed term is entitled to the balance of what she would have earned to the end of the term. Common law reasonable notice does not apply.

As for the duty to mitigate, the court found that it generally does not apply to fixed-term agreements. It based its conclusion on Bowes v Goss Power Products Ltd., a 2012 decision of the court in which it concluded that early termination clauses fixing the period of notice or payments in lieu thereof are like liquidated damages clauses or a contractual sum that do not attract mitigation. Damages are fixed as opposed to being “at large” (as is the case with damages for reasonable notice) and apply regardless of actual loss. In these cases, the parties have contracted for certainty. To turn around and require the employee to deduct re-employment income so that damages reflect actual loss is inconsistent with the intention of the parties and is unfair to the employee.

In Bowes, the agreement at issue was not a fixed-term contract and included an early termination clause fixing the amount of damages owed. Notwithstanding these differences, the appeal court found that early termination clauses and fixed-term agreements were sufficiently similar — both contract out of common law reasonable notice and specify damages owed on breach (albeit impliedly in the case of fixed-term agreements) — that the rationale for finding no obligation to mitigate was equally applicable to fixed-term agreements.

That conclusion is a clear departure from the principle that an innocent party has an obligation to mitigate her damages. The law imposes an obligation on a wronged party to take reasonable steps to limit her loss following a breach of contract. In a commercial context, parties are generally always required to mitigate when suffering a loss as a result of another’s breach, the principle being that the innocent party cannot simply sit back and do nothing when she has suffered damage. There are few exceptions to this rule. The fact that damages are potentially knowable at the date of breach, being the amount the innocent party would have earned had the contract been performed, does not release her from her obligation. 

There appear to be sound policy reasons behind the Court of Appeal’s decision. Owing to the power imbalance between many employers and employees, it makes sense to, on occasion, depart from established principles and treat these contracts differently from  commercial contracts. Courts, including the Supreme Court of Canada, have relied on this inherent difference in interpreting employment contracts in a manner inconsistent with its terms but which better reflects the actual relationship between the parties, for example, in finding that an independent contractor is actually an employee or a dependent contractor, or in finding that an employee under a series of fixed-term agreements is actually employed for an indefinite term.

The Court of Appeal is essentially telling employers to reap what they sow. While fixed-term agreements create certainty for the employer, they are often more precarious for the employee. In some cases, these agreements free employers from certain obligations under the Employment Standards Act at the expense of the employee. If the employer wants certainty by contracting for a fixed term, it’ll have to pay the employee over the entire term, unless it includes a clause that mitigation applies.

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Rhea Kamin practices employment law at Teplitsky Colson LLP, acting primarily for employees.