During the summer of 2012 the Ontario Court of Appeal changed the rules that apply to employment contracts with the decision of Bowes v. Gros Power Products Ltd. It was formerly the case in Ontario that if an employee was dismissed without cause, and their employment contract provided for a fixed amount of severance, the employer could still deduct from the severance any amount that the employee earned at a new job. This practice stemmed from the common law rule, which still applies in the absence of an agreement to the contrary, that employees are required to mitigate their damages on termination. Essentially this means that dismissed employees are required to look for a new job in order to claim full severance from their previous employer. Once employees do find new employment their entitlement to severance normally gets reduced by the amount of their new salary.
The Bowes case changes this when an employment contract contains a severance clause. The Court of Appeal decided that when a contract provides for a fixed amount of severance, deductions for mitigation may only be made if the employment contract clearly allows them. The result in Bowes was that the employer had to provide the employee with six months’ of salary even though the employee found a new position within three weeks.
The case adds one more complication to the drafting of employment contracts in Ontario. Severance clauses in employment contracts must already be carefully worded to avoid infringing the Ontario Employment Standards Act. The Bowes decision now makes it necessary to ensure that by inserting a severance clause into a contract, the employer doesn’t relieve its employees from mitigating their damages on termination.
Based in Kanata, the law firm of Connolly Nichols Allan & Snelling provides corporate & commercial, real estate, family, criminal and civil litigation services (including employment law advice for both employees and employers) in Ottawa and the surrounding area.