Legal Words

The decision could be good news for wrongfully dismissed employees

By Hendrik Nieuwland

The recent Court of Appeal decision in Brake v. PJ-M2R Restaurant Inc. has significant implications for employers involved in wrongful dismissal litigation. The court clarified a number of issues concerning mitigation income that can be used to offset a reasonable notice award in damages. It could be said that the decision in Brake can have the effect of placing a wrongfully dismissed employee in a better position than they would have been

in had the employment contract been fulfilled. In this regard, Brake runs contrary to the foreseeable damages principle articulated more than a century ago in Hadley v. Baxendale. 

Background

Brake v. PJ-M2R Restaurant Inc. concerned the dismissal of Esther Brake. Brake was employed at various McDonald’s restaurants for more than 25 years. She worked her way up to a manager position, and held this position from 2004 to 2012 at three separate McDonald’s restaurants owned by the defendant, PJ-M2R Restaurant Inc. Brake had received strong performance reviews for over 10 years, but her ratings saw an accelerating decline beginning in 2010. As a result, in 2012 Brake was placed on McDonald’s progressive discipline program, known as the Goals Achievement Process (GAP). After 90 days, Brake was told she had failed the GAP program and was given a choice between demotion and termination. Brake refused the demotion and was terminated. She brought an action for wrongful dismissal against PJ-M2R.

At trial, the judge found that Brake’s poor performance did not amount to cause for dismissal and held that she had been constructively dismissed. Brake was awarded damages equivalent to a 20-month notice period.

Court of Appeal decision

The Court of Appeal upheld the trial judge’s decision. The court then considered income that Brake had earned during the notice period. Brake had received Employment Insurance (EI) benefits, and had worked as a cashier at Home Depot, Sobey’s and Tim Hortons after being dismissed. 

The court held these amounts were not deductible as mitigation income because they were earned during the statutory notice period or were earned from “inferior employment.” The court also found that EI benefits received during the notice period could not be used to reduce wrongful dismissal damages.

Implications in light of
Hadley v. Baxendale

The rule in Hadley v. Baxendale holds that upon a breach of contract, the plaintiff shall be entitled to damages that “make them whole.” Damages should place the plaintiff in the same position they would have been in had the contract not been breached. 

As a result of Brake, a wrongfully dismissed employee may be placed in a better position than they would have been in had the employer complied with the employment contract. It is an implied term of every contract of employment that, absent cause for dismissal, the employer will provide an employee with reasonable working notice of their dismissal. An employer can satisfy this obligation by paying the employee damages in lieu of notice. Reasonable notice damages are calculated based on what the employee’s earnings would have been during the notice period – no more and no less.

However, a terminated employee has an obligation to act reasonably to lower her damages from her loss of employment. In practice, this means the employee has a duty to make all reasonable efforts to secure comparable employment. Ordinarily, this “mitigation” income reduces the damages an employer must pay.

Nevertheless, the Brake decision clarified that not all “mitigation” income reduces damages. The court found that the following income does not reduce damages:

Income earned during the statutory notice and severance period;

EI benefits received during the reasonable notice period; and

Income earned from an “inferior position.”

1. Income earned during the statutory notice and severance period

The court held that income earned during the statutory entitlement period, that is the minimum period of notice and severance dictated by the Employment Standards Act, 2000 (ESA), is not deductible as mitigation income. Statutory entitlements under the ESA are not subject to mitigation because they are not damages. These amounts are not linked to any actual loss suffered by the employee, but are payable in any event. 

The result of this holding is that a terminated employee may receive more than she would have been entitled to had the employer complied with the employment contract and offered reasonable working notice of termination. The employee will receive her statutory entitlement to notice and severance pay (if applicable), and in addition any income she earns from a new job during that same period. 

2. EI benefits

The court held that EI benefits received during the notice period are not to be deducted from a damages award for wrongful dismissal. EI payments provide temporary income support to unemployed workers while they look for employment or upgrade their skills.  It is commonplace for an employee who is dismissed without cause to apply for and receive EI benefits. It is also relatively common for a dismissed employee to obtain a severance settlement from her employer. If the CRA does not learn of the settlement, or does not insist on repayment of EI benefits, the result will be that the employee will receive more than she would have been entitled to had the employer simply provided reasonable working notice. This is another example of how Brake can place a terminated employee in a better position than she would have been in had the employer complied with the employment contract.

3. Income earned from “inferior employment”

The court held that where a wrongfully dismissed employee is effectively forced to accept a much inferior position because no comparable position is available, the amount earned in that position is not to be deducted from wrongful dismissal damages. While an employee is not required to take an inferior position to mitigate her losses, this scenario still places the employee in a better position than she would have been in had the employment contract be followed. 

Conclusion

The decision in Brake clearly benefits dismissed employees. Employers need to keep in mind that they cannot always count on the earnings a former employee receives from new employment reducing their damages. n

Hendrik Nieuwland is a partner at Shields O’Donnell MacKillop LLP in Toronto. This article was written with assistance from Seth Holland, an articling student at Shields O’Donnell MacKillop LLP.