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Court of Appeal Rules That Not All Mitigation Income Will Be Deducted from Wrongful Dismissal Damages

Overview

The plaintiff was a 25-year employee of various MacDonald’s restaurants. She had been employed for 20 of those years by the defendant. Following her first negative performance review after many years of strong performance, she was transferred to a Wal-mart location that had been struggling for some time. After several months at the Wal-mart location, the plaintiff’s performance review continued to be less than adequate and she was placed on a 90-day progressive discipline plan. At the end of the 90 days, the plaintiff was told that she had failed the plan and was given a choice between a demotion from restaurant manager to a first assistant, and termination. She refused on the basis that the demotion would be humiliating for her and was then immediately terminated. In her subsequent wrongful dismissal action, the employer alleged among other things that it had just cause to terminate the plaintiff due to performance issues. That defence was rejected by the trial judge and the plaintiff was awarded 20 months’ pay in lieu of notice. The employer appealed on several grounds: that the plaintiff was not wrongfully terminated; that her refusal to accept the position of first assistant constituted a failure to mitigate, thereby disentitling her to damages; and that the trial judge failed to properly account for income that the plaintiff earned during the notice period. At the time of her dismissal the plaintiff was 62 years old.

Mitigation during the Notice Period

The Court of Appeal’s decision in Brake v. PJ-M2R Restaurant Inc., 2017 ONCA 402 (CanLII) is particularly significant in the way it deals with the mitigation of damages during the notice period and the amounts that are to be deducted from those damages. The employer advanced two arguments in respect of the mitigation issue:

1. that the trial judge erred in finding that the plaintiff had made reasonable efforts to mitigate her losses; and

2. that the trial judge erred in law in failing to deduct from the damages award the income that the plaintiff had received during the notice period

The Court rejected the employer’s first argument and commented that:

“There is no magic formula that an employee must follow when making reasonable efforts to obtain other employment and thereby mitigate his or her loss.  When an employer alleges that a former employee has not reasonably mitigated his or her losses,

“the question is whether [the employee] has stood idly or unreasonably by, or has tried without success to obtain other employment”: Michaels v. Red Deer College, 1975 CanLII 15 (SCC), [1976] 2 S.C.R. 324, at p. 331.

A terminated employee is entitled to consider her own long-term interests, so she will not fail to mitigate merely because she chooses to take some career risks that might not minimize the compensation that her former employer will owe to her: Peet v. Babcock & Wilcox Industries Ltd.(2001), 2001 CanLII 24077 (ON CA), 53 O.R. (3d) 321 (C.A.), at para. 8. Thus, the fact that Ms. Brake did not apply for other restaurant management positions does not mean that she did not make reasonable efforts to mitigate.”

With respect to the employer’s second argument, the Court declined to reduce the damages award by the amounts that the plaintiff received during the notice period on the basis that they were not “amounts received in mitigation of loss”.

The Court articulated the general principle that “an employee who is dismissed without reasonable notice is entitled to damages for breach of contract based on the employment income the employee would have earned during the reasonable notice period, less any amounts received in mitigation of loss during the notice period” On the case before it, however, that Court declined to reduce the damages award by the amounts that the plaintiff received during the notice period because, in the Court’s view, they were not “amounts received in mitigation of loss”.

The Court dealt specifically with the 3 heads of income received by the plaintiff during the 20-month notice period.

1. EI Benefits

After a thorough review of the relevant case law, the Court confirmed that the law is settled: EI benefits are not to be deducted from damages awarded for wrongful dismissal.

2. Employment Income earned during the Statutory Entitlement Period

When the plaintiff’s employment was wrongfully terminated, she was entitled to two types of compensation – termination and severance pay under the Employment Standards Act (the “ESA”), and common law damages for wrongful dismissal.  The trial judge awarded damages based on what the plaintiff’s remuneration would have been over a 20-month time period but made clear that the damages award was inclusive of her statutory entitlements.  The Court of Appeal confirmed that statutory entitlements are not damages and the plaintiff was entitled to receive her statutory entitlements even if she secured a new full-time job the day after her employment was terminated. Consequently, the income that she earned during her statutory entitlement period was not subject to deduction as “mitigation income”.  In this regard, the Court of Appeal adopted the reasons of the Divisional Court in Boland v. APV Canada Inc. (2005), 2005 CanLII 3384 (ON SCDC), 250 D.L.R. (4th) 376.

Effectively the Court confirmed that only employment income earned during the common law notice period is subject to deduction as mitigation income. As a result, the Court went on to find that trial judges should determine the statutory entitlement period, and identify which post-termination employment income is attributable to that period, and which is attributable to the balance of the notice period.

With respect to the burden of proof, in situations where the Court makes a blended damages award, the onus is on the employer to prove what employment income is attributable to the statutory entitlement period and what employment income is attributable to the balance of the notice period.  Specifically, once an employee has proven wrongful dismissal and has adduced evidence of his or her losses, the onus shifts to the employer to demonstrate that some or all of those losses were avoidable or avoided.

3. Employment Income in the Balance of the Notice Period

The notice period of 20 months expired near the beginning of April 2014 and during the balance of the notice period, Ms. Brake received income from Sobey’s and from Home Depot.

While employed by the defendant and to the defendant’s knowledge, Ms. Brake supplemented her income by working part-time at Sobey’s. After her termination, she increased her hours at Sobey’s. In addition, in March 2013 she accepted a position as a cashier at Home Depot where she worked approximately 35-38 hours per week.

In determining whether this income ought to be deducted from her damages award, the Court commented that in a wrongful dismissal action, an employer is generally entitled to a deduction for income earned by the dismissed employee from other sources during the common law notice period:

“However, as Rand J. explained in Karas v. Rowlett, 1943 CanLII 53 (SCC), [1944] S.C.R. 1, at p. 8, for income earned by the plaintiff after a breach of contract to be deductible from damages, “the performance in mitigation and that provided or contemplated under the original contract must be mutually exclusive, and the mitigation, in that sense, is a substitute for the other.” Therefore, if an employee has committed herself to full-time employment with one employer, but her employment contract permits for simultaneous employment with another employer, and the first employer terminates her without notice, any income from the second employer that she could have earned while continuing with the first is not deductible from her damages: see S.M. Waddams, The Law of Damages, loose-leaf (Rel. Nov. 2016), 2d ed. (Toronto: Canada Law Book, 1991), at para. 15.780.”

The Court relied on the reasoning of the Saskatchewan Court of Appeal in McIntosh v. Saskatchewan Water Corp. (1989), 1989 CanLII 4781 (SK CA), 26 C.C.E.L. 196 (Sask. C.A.). There, a resource economist who was wrongfully dismissed, taught an evening class in economics during the notice period. The trial judge declined to deduct the income earned from this job because the plaintiff “could have taught this evening course if he had remained in the respondent’s employ”.

The Court held that this principle applied in the case before it.  Since the plaintiff had worked part-time at Sobey’s while working full-time for the defendant, her work for Sobey’s and her work for the defendant were not mutually exclusive.   Had the plaintiff not been terminated, she could have continued to supplement her income through part-time work at Sobey’s.  As a result, the Court did not deduct the income that she received from Sobey’s during the balance of the notice period from the damages award. The Court held that the amounts received from Sobey’s did not rise to such a level that the plaintiff’s employment at Sobey’s could be seen as a substitute for her work at the defendant.

What is particularly concerning to employers is Justice Feldman’s concurring reasons where she dealt in more detail with the income earned by the plaintiff at Home Depot. Justice Feldman explicitly upheld the trial judge’s decision in which he declined to deduct the Home Depot income on the basis that:

“The cashier position she occupies now at Home Depot is so substantially inferior to the managerial position she held with the Defendant that the former does not diminish the loss of the latter.”

Justice Feldman confirmed that “a wrongfully dismissed employee has a duty to try to mitigate her damages by making reasonable best efforts to obtain a position that is reasonably comparable in salary and responsibility to the one from which she was wrongfully dismissed. If she is able to secure such a position, her earnings are deducted from her damages as mitigation. If she turns down such a position, or fails to make reasonable best efforts, then the amount she could have earned at a comparable position is similarly deducted from her damages, based on a failure to meet the duty to mitigate.”

Significantly, however, if an employee can only find a position that is not comparable in either salary or responsibility, she is entitled to refuse it and if she does so, the amount she could have earned is not deducted from her damages. By analogy, the Court held that:

“that where a wrongfully dismissed employee is effectively forced to accept a much inferior position because no comparable position is available, the amount she earns in that position is not mitigation of damages and need not be deducted from the amount the employer must pay.”

This case is a substantial win for employees. Although they have a duty to mitigate their damages, if they are forced, for example, for economic reasons to accept a substantially inferior position in order to pay the bills, those earning may not be deducted from their wrongful dismissal damages.

It remains to be seen whether the concurring decision of Justice Feldman will be adopted in other decisions; if so the challenge facing an employer seeking to advance a mitigation argument may well prove insurmountable and at the very least will require a strong evidentiary record.

 

Written by Susanne Balpataky Susanne Balpataky is an experienced commercial litigator who has practiced at Speigel Nichols Fox LLP since joining the firm in 1991.