Generally speaking, when an employee is terminated without cause, he or she is entitled to termination and severance pay as laid out in the Employment Standards Act (ESA). This is considered the minimum standards. Employers cannot contract out of their obligation to pay the minimum standards. On the other hand, at common law, employees can seek compensation in accordance with the principles of reasonable notice, which will often exceed their minimum entitlements under the ESA. However, the latter is normally subject to mitigation.
While employees should receive their full entitlements under the ESA when their employment is terminated without cause, where the employee seeks compensation for reasonable notice or pay in lieu thereof, the amount received is reduced by the employee’s earnings post-termination. This means, for example, that where an employee may have been entitled to 12 months of reasonable notice, but he or she finds alternate employment after 6 months, earning the same or more than at the previous job, the employee may only be entitled to 6 months of reasonable notice. This is so because, in the eyes of the Court, after the employee found the new job, the employee was no longer suffering any loss.
Commonly, with regard to reasonable notice, employees have a duty to mitigate, that is, to take reasonable steps, such as applying for and accepting a job, to reduce their losses. However, there are circumstances in which employees may be exempted from the duty to mitigate. Please see our previous blog on the duty to mitigate for further discussion.
Recently, the Court in Gula v. Freed Developments provided further guidance on where an employee whose employment is terminated without cause may not be required to mitigate. Here, the Court held that, as the contract of employment specified the notice period, or pay in lieu of notice, where the employee is terminated without cause, the parties contracted out of the common law principles of reasonable notice, and instead, the amount of notice was set by the contract. As the employment contract made no reference to mitigation, the employee was under no obligation to mitigate, and therefore could recover the full amount set out in the contract with regard to notice.
In the Gula case, the employment contract provided that if the employer were to terminate the employee without cause during the first 12 months of employment, the employer would have to pay the equivalent of 6 months salary and benefits. Once the employment relationship exceeded 12 months, the contract stipulated that the employer would have to pay one additional month of base salary and benefits continuation for every additional year of employment, to a maximum of 15 months. The contract did not make any reference to mitigation.
The employee involved in the Gula case was terminated without cause, but found alternate employment almost immediately, earning an equivalent amount to what he was previously earning. Because of this, the Court had to determine whether the employee had mitigated his damages, in which case, he could only recover the amount prescribed by the ESA minimum standards.
The Court in Gula held that where a contract with an indefinite term, prescribes a fixed notice period, as was the case here, the employee is under no duty to mitigate, where the contract does not make any reference to mitigation. Accordingly, the employee was awarded 6 months of salary and benefits continuation for the first 12 months of service, and an additional month of salary and benefits for each subsequent year of service, as stipulated in the contract.
As lawyers with expertise in employment law, we often advise employees on their employment rights and obligations during and post-termination. Similarly, we guide companies regarding their employment contracts and how to best limit their liabilities. You may contact us at any time with your questions.
