Employers cannot always rely on mitigation to reduce liability

In Brake v. PJ-M2R Restaurant Inc. the Ontario Court of Appeal imposed limitations on an employer’s ability to rely on a former employee’s mitigation earnings to reduce its liability.

Background

Esther Brake, a 20-year employee of a McDonald’s franchisee was placed on a 90-day performance improvement plan after several years of strong performance. At the end of the program Ms. Brake was given a choice between a demotion from her Manager position and termination of her employment because of alleged performance issues. Ms. Brake refused the demotion, was terminated and began proceedings against the Defendant.

The trial judge found that Ms. Brake was constructively dismissed and fixed her notice entitlement at 20 months, including her statutory severance entitlement.

The Ontario Court of Appeal Decision

The employer’s appeal of the trial decision was dismissed by the Court of Appeal with respect to the constructive dismissal finding and the notice period assessment.

Regarding the damage award, the employer challenged the trial judge’s treatment of mitigation, arguing in part that Ms. Brake was obliged to accept the demotion to mitigate her damages.

The majority of the Court found that Ms. Brake was not obliged to accept the demotion. The Court pointed out that the central issue was whether a reasonable person in Ms. Brake’s position would have accepted the offer and that an employee is not obliged to mitigate by working in an atmosphere of hostility, embarrassment or humiliation. The court, relying on the Supreme Court of Canada’s decision in Evans v. Teamsters, Local 31, upheld the trial judge’s finding that it would have been “downright insulting” for Ms. Brake to have accepted a demotion and therefore not something a reasonable person would accept.

The most interesting aspect of the Court’s decision, however, lies in its reasoning regarding the duty to mitigate.

The Court noted that, as a general matter, income earned during the notice period is appropriately deducted from any damages awarded. In this case, there were three sources of such income and the Court commented on the deductibility of each source:

1. Employment Insurance (“EI”) Benefits

The Court confirmed the settled law that EI benefits are not to be deducted from damages because an employer should not benefit from its wrongful termination of an employee which requires that the employee make use of EI benefit entitlements.

2. Employment Income Earned During the Statutory Notice Period

With respect to income earned during the statutory notice period, the Court concluded that the employment income which Ms. Brake earned during her statutory notice entitlement period was not deductible as mitigation income. The Court reasoned that statutory entitlements (termination and severance pay) are not damages and that employees are entitled to receipt of these statutory entitlements whether or not they secure new employment during the period they are intended to cover.

3. Income earned outside of the statutory notice period

Regarding the income earned in the balance of the notice period, the Court considered that Ms. Brake held a job at a grocery store and a hardware store throughout this period. Since Ms. Brake had worked part time at the grocery store while working for McDonald’s, the Court concluded that the income she earned while continuing to work at the grocery store following her dismissal was a supplemental source since Ms. Brake could have earned it while continuing with her primary employment. Therefore, the Court concluded that this income was not subject to deduction from a damages award.

With respect to non-supplemental income earned past the statutory notice period, the Court considered the evidence on the record to be unclear and therefore refrained from deducting the modest amount received from the damages award. Of note, however, is that the minority found that the trial judge was entitled to find that the hardware store position was so substantially inferior to the managerial position Ms. Brake had held at McDonald’s that it should not be considered in mitigation.

Takeaway

The Brake decision furthers the onerous burden on employers in advancing mitigation arguments. Rather than simply establishing that income was earned during the notice period, employers will need to focus on when the income was earned, and the type of job from which the income was derived.

With respect to the latter, the Brake decision makes clear that courts will want to assess whether pre-existing supplemental part-time work can be considered as substitute employment which should be considered as mitigation employment, and whether new employment constitutes comparable employment.