ONCA Finds "Golden Parachute" Provision not Implicitly Subject to the Duty to Mitigate


Time Published on June 25, 2012

In a decision by a rare, five-judge panel, the Ontario Court of Appeal (ONCA) ruled that a specific notice provision in an employment contract was not implicitly subject to the duty to mitigate.

Bowes v. Goss Power Products Ltd.

Mr. Bowes and Goss Power had entered into an employment agreement which provided a particular formula setting out Bowes’ entitlement to notice or pay in lieu, should Goss Power terminate his employment without cause.  The agreement made no reference to any duty on Bowes to mitigate his damages by looking for alternate employment.

Goss Power terminated Bowes without cause.  Based on the formula in the agreement he was entitled to six months’ notice or pay in lieu.  Goss Power advised in its termination letter that it would pay his entitlements by salary continuance and that he was obliged to notify Goss Power should he obtain new employment. 

Bowes found a job in two weeks and advised Goss Power, which summarily paid out his minimum entitlements under the Employment Standards Act and stopped remaining payments under his salary continuance.  Bowes applied to the court for an interpretation of the agreement, arguing that he was entitled to a lump sum payment on termination equal to the entire six-month contracted period, without any deduction for mitigation.  The application judge disagreed, holding that the employment contract should be interpreted to implicitly include the employee’s obligation to mitigate by looking for work.

Bowes appealed to the ONCA.  The ONCA held that it was an error for the application judge to equate the concept of mitigation, which is related to damages for breach of contract, with the interpretation of a written employment agreement that provides for a fixed, pre-negotiated notice entitlement.  There was no double-recovery here.  The parties had negotiated a specific termination entitlement, which was lawful, but the ONCA held that it was inappropriate to read-in restrictive provisions to which the parties had not expressly agreed.  The ONCA noted that the formula in the agreement provided a cap of 12 months possible notice, despite the fact that under the common law awards of twice that were possible. 

Lessons for Employers

This case highlights the fact that parties are free to enter into agreements with respect to notice of termination, either for ESA only or for some formula that must provide a greater entitlement than ESA minimums.  Sometimes there is good reason for providing extended and/or guaranteed notice, such as to balance out a non-competition provision.

However, such agreements must be very carefully drafted and implemented to ensure statutory compliance and enforceability.  If employers want to provide a period of salary continuance with a claw-back should the employee mitigate (which Goss Power apparently intended), this should be clearly expressed in the terms of the agreement.  In such circumstances, we often recommend that agreements provide a claw-back of one-half of the remaining continuance after mitigation, to motivate employees to find work and thus reduce termination costs. 

Tag employment law,  wrongful dismissal litigation