An employer’s post-termination liability

Introduction

It is well established that under common law principles applicable to employment contracts, employers have an implied contractual obligation to give indefinite-term employees notice of termination of the employment relationship unless there is “just cause” for immediate dismissal.¹ Unless the employer and employee contractually agree on the length of notice to be given prior to the dismissal the courts will imply a term of “reasonable notice”. Where there is no cause for immediate dismissal, or the notice provided is less than agreed upon or reasonable, the dismissal is said to be “wrongful.” ² Therefore, Canadian employers must dismiss their employees with proper notice or pay in lieu thereof.

Two recent Ontario Court of Appeal decisions have revealed the extent to which employers may be held liable following the termination of an employee without cause. The following is a review of Brito v. Canac Kitchens³ and Bowes v Goss Power Products Ltd Inc.⁴. Brito illustrates how an employer can be held liable for ongoing disability benefits long after the employee has been terminated. Bowes distinguishes between the common law duty to mitigate damages upon wrongful termination and adhering to the explicit terms of an employment contract that does not address mitigation.

Brito v. Canac Kitchens

Mr. Olguin was 55 years of age when he was terminated without cause from twenty-four years of employment as a kitchen cabinet and door maker with Canac Kitchens. Upon termination in July 2003, Mr. Olguin received from his employer an amount equal to the minimum statutory requirement pursuant to the Employment Standards Act for pay in lieu of notice and severance for thirty-two weeks’ salary, plus associated benefits for a period of eight weeks. Within two weeks following the termination of his employment, Mr. Olguin found alternate employment with Cartier Kitchen. However, his compensation with his new employer was at a significantly lower rate than he had received with Canac Kitchens and no disability insurance was provided. Approximately 1½ years after Mr. Olguin commenced his new employment, he was diagnosed with cancer of the larynx and had to undergo a series of invasive treatments.

Mr. Olguin eventually sued Canac Kitchens for damages for wrongful dismissal and associated benefits, including the short-term disability (STD) and long-term disability (LTD) benefits to which Mr. Olguin claimed he would have been entitled under the company sponsored disability benefits plan (the “Plan”) but for the wrongful termination of his employment. The trial judge, the late Mr. Justice Echlin, held that the termination of Mr. Olguin’s employment was wrongful and that the appropriate notice period should have been twenty-two months. Justice Echlin stated that Mr. Olguin was clearly entitled to “be made whole” for the period from July 15, 2003 (the date of his dismissal) to November 6, 2004 (the date when he became disabled). This resulted in an entitlement of nearly 16 months salary, less the agreed upon statutory payments paid by Canac Kitchens and less Mr. Olguin’s earnings from Cartier Kitchen. As the costs of the Canac disability coverage were contributed to by Mr. Olguin, the court distinguished Sylvester v. British Columbia⁵. Mr. Olguin was awarded damages for all of his lost employment income for twenty-two months, plus STD benefits for seventeen weeks, and LTD benefits thereafter, until the of age 65. Mr. Olguin was also awarded ancillary damages in the amount of $15,000 because of Canac’s “hard ball approach” in its treatment of Mr. Olguin and its aggressive defence of his various claims.

The employer appealed the award of damages for lost LTD benefits and the award of ancillary damages.

With regard to Mr. Olguin’s LTD benefits, one of the issues before the Court of Appeal was whether Mr. Olguin was “totally disabled” within the meaning of the Plan so as to qualify for LTD disability benefits. The court dismissed this portion of the appeal and found that Mr. Olguin was rightfully entitled to LTD benefits. The definition of total disability under the Plan required that the Mr. Olguin be unable to perform the essential duties of his own occupation during the “Qualifying Period” and the two years immediately thereafter. The court concluded that in Mr. Olguin’s case, after the exhaustion of his STD benefits, this period ran from March 4, 2005 to March 4, 2007. After the first two years, the Plan required that Mr. Olguin be unable to perform the essential duties of any occupation for which he was or might reasonably become qualified by training, education or experience. The Court was satisfied that there was a firm evidentiary foundation for the trial judge’s conclusion that the respondent met his burden to establish his total disability within the meaning of the Plan from and after March 4, 2005 to the date of trial and was likely to remain disabled to age 65. As such, Mr. Olguin was entitled to his disability benefits throughout.

The Court of Appeal set aside the award of ancillary damages however, because they were in the nature of punitive damages, Mr. Olguin had not claimed punitive damages and therefore “whatever view one might hold of the appellant’s conduct, it was not open to the trial judge to award punitive damages” ⁶ .

Brito has recently been considered in Rubin v. Home Depot Canada Inc.⁷. In this case Mr. Rubin had signed a release upon termination without cause and received 28 weeks pay in lieu of notice. The court granted the motion for summary judgment and held that, given the circumstances under which it was signed, the release should not be enforced and the judge awarded 12 months notice. It is interesting to note that the judge made the following additional observations with regard to Brito:

“Insofar as the value of the benefits is concerned, it may be that had Eric Rubin become ill more than eight weeks after his termination, the signing of the release would have foreclosed any claim he might have made, but this is the sort of calculation made in any settlement. One may do better to wait, but there can be advantages in accepting the payment offered even with the incumbent risk. The fact remains that, in Brito, the employee had not signed a release.”⁸

Implications from the employee’s perspective

The legal implications here are straight forward. Employers should be mindful that upon termination of employment without cause, they may be legally obligated to honour the terms of a company sponsored health plan for the duration of the employee’s reasonable notice period. In the case of disability benefits, particularly where the disability is long-lasting, this obligation can be onerous.

Employers can avoid this exposure with a carefully written and legally binding release at the time employment is terminated. More than minimum statutory benefits will normally have to be provided to make the release effective.

Plaintiffs’ counsel, since the decision of the Ontario Court of Appeal in Egan v. Alcatel⁹, have often sought additional consideration for the loss of sick and disability leave benefits during the reasonable notice period particularly if there is a concern about the terminated employee’s health and ability to work. With this most recent decision, we anticipate that plaintiffs’ counsel will be increasingly diligent in this regard.

Certainly any lawyer consulted by any terminated employee should take the trouble to inquire whether there are any health issues that might affect settlement. The client must also understand that he or she is releasing any future claims he or she may have to sick and disability benefits once a release is signed.

Bowes v Goss Power Products Ltd

Mr. Bowes was terminated by his employer, Goss Power Products Ltd (GPP) without cause and without notice. His employment agreement with his employer provided that if he was terminated without cause, he was entitled to a fixed period of notice or pay in lieu. The severance provision in the Employment Agreement was set out at paragraph 30(c):

30. The Employee’s employment may be terminated in the following manner and in the following circumstances:

(c) By the Employer at any time without cause by providing the Employee with the following period of notice, or pay in lieu thereof:

(i) Four (4) months if the Employee’s employment is terminated prior to the completion of twenty-four (24) months of service;

(ii) Five (5) months if the Employee’s employment is terminated prior to the completion of thirty-six (36) months of service;

(iii) Six (6) months if the Employee’s employment is terminated prior to the completion of forty-eight (48) months of service; and

(iv) Seven (7) months plus one (1) month for each additional full year of service over four years if the Employee’s employment is terminated after forty-eight (48) months from commencement up to a maximum of, in total, twelve (12) months notice.

Paragraph 31 of the Employment Agreement provided that the payment in paragraph 30(c) is calculated on base salary only. And paragraph 33 of the Employment Agreement further provided:

33. The Employee agrees that the notice provided [in] subsection 30(c) is in compliance with and in excess of the statutory minimum standards owed to the Employee and set out in the Employment Standards Act and constitutes full and complete satisfaction of any claim he/she may have to notice or compensation in lieu thereof, and to any other payments whatsoever (including any and all damages for wrongful dismissal) as a result of the termination of employment and the Employee agrees to release the Employer from any and all claims whatsoever which the Employee may have arising out of the termination, save and except for compliance with the terms herein set out. It is agreed that the notice provided in subsection 30(c) shall be an absolute, full and complete defence to any action or claim which the Employee may advance against the Employer as a consequence of any termination without cause, including, without limitation, any claim for constructive dismissal.

Following his termination, GPP agreed to pay his salary and car allowance for a period of six months. However, in its termination letter, the employer also required Mr. Bowes to seek out and locate alternate employment, although the agreement was silent with regard to the duty to mitigate. Mr. Bowes found employment with another company at the same salary two weeks after he was terminated. GPP paid the statutory three weeks’ salary, but refused to pay any more on the basis that Mr. Bowes had successfully mitigated his loss, thereby ending his entitlement under the employment agreement. Mr. Bowes brought an application for a determination of his rights under the employment agreement. The application judge held in favour of the employer, on the basis that mitigation presumptively applies to all claims for damages absent an agreement to the contrary.

On appeal, the issue before the five-judge panel of the Court of Appeal was whether an employee, who is terminated without cause, is required to mitigate his loss when entitled to a fixed term of notice or pay in lieu, and the contract of employment is silent with respect to mitigation. The Court unanimously held that the application judge erred in deciding that an agreement specifying a fixed notice period, in the event of dismissal without cause, was akin to damages in lieu of reasonable notice at common law. This led him to wrongly conclude that there was a presumption that the Mr. Bowes had a duty to mitigate and that, since the agreement was silent in respect of mitigation, the presumption had not been rebutted. The Court of Appeal held that:

“An employment agreement that stipulates for a fixed term of notice or payment in lieu should be treated as fixing liquidated damages or a contractual amount.”¹⁰

The Court clarified that mitigation is a principle that applies to calculating common law damages for failure to provide reasonable notice and it does not apply to liquidated damages or contractual amounts. Mr. Bowes was claiming a debt, not damages and therefore he should have received the payment in fulfillment of his contractual entitlement and not as damages for the breach of that entitlement.¹¹

In the opinion of the Court, the concerns about potential unfairness to the employer were without merit. The Court noted that most employment agreements are prepared by the employer and stated that “there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages”¹². The Court held that it would be unfair if an employer were able to reduce its agreement to pay an employee a fixed sum on termination by raising mitigation when mitigation was not mentioned in the employment agreement.¹³

The decision of the Court of Appeal brings Ontario jurisprudence in line with appellate decisions elsewhere in Canada.

Implications from the employee’s perspective

Ever since the 2000 decision of Justice Nordheimer in Graham v. Marleau¹⁴, there has been a trend on the part of Ontario trial judges to suggest and employer counsel to argue that there is always a duty to mitigate whatever the language of an employment agreement might be. That suggestion has been advanced even where the contract spoke in terms of a lump sum payment.

With this decision, employees who have fixed notice periods in their employment contract can be safely advised that there is no duty to mitigate if the agreement does not expressly address mitigation. Employers may however, still choose to include an express requirement to mitigate if they elect to include a fixed amount of notice that exceeds their minimum statutory obligations. Nevertheless this would appear to go directly against the principle of certainty and finality in drafting a contract that sets out fixed amounts of compensation in the first place. The Ontario Court of Appeal emphasized that “It is counter-intuitive and inconsistent for the parties to contract for certainty and finality, and yet leave mitigation as a live issue with the uncertainty, lack of finality, risk and litigation that would ensue as a consequence.”¹⁵

¹Peter Neumann & Jeffrey Sack, eText on Wrongful Dismissal and Employment Law, 1st ed ( Lancaster House 2012) at 6.1 (CanLII),

²Ibid.
³2012 ONCA 61, [2012] OJ No 376 (CA).
⁴2012 ONCA 425, [2012] OJ No 2811 (CA).
⁵[1997] 2 SCR 315, [1997] SCJ No 58.
⁶Supra note 3 at para 22.
⁷215 A.C.W.S. (3d) 651, 2012 ONSC 3053.
⁸Ibid at para 16.
⁹206 OAC 44, 52 CCPB 244.
¹⁰Supra note 4 at para 34.
¹¹Ibid at para 44.
¹²Ibid at para 55.
¹³Ibid at 24 para 61.
¹⁴49 C.C.E.L. (2d) 289, 2000 C.L.L.C. 210-034.
¹⁵Supranote 4 at para 61.