Mitigation Income: What’s In and What’s Out?
Under the common law, an employee who is terminated without cause is entitled to reasonable notice of termination, or pay in lieu thereof. That entitlement is not free of conditions. A wrongfully dismissed employee is subject to a duty to mitigation his/her losses. The duty to mitigate requires a dismissed employee to take reasonable steps to obtain equivalent employment and to accept such employment, if available, failing which the court may reduce the employee’s damages. An employer is generally entitled to a deduction in damages for income earned by the dismissed employee during the notice period. The question many employers face is whether all income earned after termination is considered mitigation income. This issue was recently addressed by the Ontario Court of Appeal in the decision of Brake v PJ-M2R Restaurant Inc. 2017 ONCA 402.
A long-serving McDonald’s restaurant manager, with over 20 years of service, was informed by her employer that she had a choice to make: accept a demotion or be terminated for alleged performance issues. The employee refused to accept a demotion and sued for constructive dismissal.
While she was employed with McDonalds, the employee also worked part-time as a cashier at Sobeys. Following her termination, she continued to work at Sobeys and increased the amount of hours she worked. After she was terminated from McDonald’s, she tried to find a comparable managerial position. Her search was fruitless and she was forced to accept low level positions at Tim Horton’s and Home Depot because she could not afford to live on the income she earned as a part-time cashier.
The trial judge held that the employee was constructively dismissed and was entitled to twenty months’ pay in lieu of notice, inclusive of statutory entitlements, with no amounts deducted as mitigation income. The decision was appealed by the employer.
The Ontario Court of Appeal upheld the decision of the trial judge. With respect to the issue of mitigation income, the Court of Appeal explained that not all income earned by the employee during the notice period will be deducted from an award of damages. More specifically, it clarified that:
- Income earned during the statutory notice period will not be deducted. Statutory entitlements are not subject to mitigation. An employee is entitled to receive his/her statutory entitlements even if they secure new employment immediately after termination.
- Income earned from employment that was, at one point, simultaneous with income earned from the terminating employer, will not be deducted so long as the employer did not prohibit the simultaneous employment. Therefore, if an employee who has more than one job is terminated without cause, any income from the second employer is, generally, not deducted.
- Income earned from new employment that is substantially inferior to the former employment will not be deducted, if it was accepted out of necessity. A wrongfully dismissed employee is not required to accept employment that is substantially inferior to their former employment and, if they do, the amounts earned are not considered mitigation income.
What This Means for Employers
This decision narrows the scope of when post-termination income may be used to reduce an employer’s liability. It is not merely sufficient for an employer to provide evidence that income was earned by an employee during the notice period. An employer must also establish (1) when the income was earned (e.g. within the statutory notice period or outside of the statutory notice period) and (2) whether the new employment is comparable to the former employment. Furthermore, if the employee was earning additional income prior to termination, this will preclude an employer from including any income earned from the second employer as mitigation income.