An Employee’s Duty to Mitigate in Severance Packages
The Basics – The Duty to Mitigate Refers to an Employee’s Legal Obligations after Losing Their Job
Before delving into the topic of an employee’s duty to mitigate financial losses they suffer after losing their job, it is important to understand the context in which this arises. Most importantly, it is helpful to understand that this legal obligation on employee typically arises after their employment is terminated, and they are offered a settlement offer from their employer to compensate them for the loss of their job (i.e., to provide them with a financial “cushion” as they search for and eventually transition to new employment).
Under employment law in Ontario, an employee who is terminated from their employment is often owed a financial severance package from their employer. Basically, this is an employer’s settlement offer to an employee providing them with a financial payment to assist them for a period of time after their employment ends. Among other things, a severance package will often the employee’s base salary, bonus pay, health benefits, pension plan benefits, and so on.
Generally, an employer is legally required to provide a severance package any time an employee’s job ends, except if:
- the employee is fired “for cause” (i.e., serious misconduct); orf
- the employee voluntarily resigns (i.e., quits their job)
In the vast majority of cases, most employees in Ontario are terminated from their job “without cause.” As a result, it is safe to assume that many people have received or reviewed a severance package at one point or another. In exchange for severance payment outlined in the severance package, an employer will often ask the employee to sign a legal release (waiver) whereby they agree to give up all legal claims he or she may have against the employer (e.g., a wrongful dismissal claim or discrimination complaint).
Given the consequences of accepting or rejecting an employer’s severance package offer, it is crucial for employees to review it carefully with an experienced employment lawyer to understand whether the severance offer is fair, the employee’s legal rights in Ontario, as well as their options moving forward.
The Basics – What is the Duty to Mitigate?
The “duty to mitigate” is a legal rule in employment law requiring an employee to take reasonable steps to reduce the financial impact they suffer after losing their job. It comes from a basic rule in general contract law, which requires a the victim in a breach of contract dispute (in this case, an employee who is fired from their job without cause), to take reasonable steps to reduce or lessen the financial loss caused by other party’s failure to abide its legal contractual obligations.
In the employment context, the duty to mitigate means that an employee who has suffered a termination of employment has a legal obligation do what an ordinary person in their shoes would normally do after losing their job – that is, taking steps to look for another job. So, it can include searching for and applying for comparable employment opportunities, doing job interviews, attending network meetings, updating a resume, and so on.
Contrary to some misconceptions, the requirement for employers to provide a severance package is not to punish the employer for firing an employee, or to reward the employee for their years of service or performance. Rather, it reflects a basic policy decision: requiring employers to provide some financial support to employees who lose their job, shifts the initial responsibility to employers themselves and helps reduce the burden on government by reducing the amount of employees having to rely on Employment Insurance (EI) benefits. At the same time, the law expects dismissed employees themselves to take on some responsibility in reducing the financial impact of losing their job by looking for new employment. Just like EI benefits are only intended as a form of temporary relief, a severance package is only intended to “soften the blow” of job loss by providing employees with some financial support as they transition to new employment.
How does the Duty to Mitigate Factor into Severance Package and Wrongful Dismissal Claims?
The duty to mitigate plays an important function in the context of wrongful dismissal claims. Generally speaking, if a court finds the employee did not make reasonable efforts to seek mitigation their losses, it may decrease the amount of financial compensation the employee is owed. Similarly, if the employee fulfills their duty to mitigate and, as a result, is successful in obtaining in a comparable job during the reasonable notice period, the court would reduce any employment income the employee earns from a new job from the amounts the employer is required to provide.
Who has to prove the employee failed to mitigation their loss resulting from a termination of employment? Put simply, it is the employer who must prove that the employee did not take reasonable steps to mitigate their losses – and this is an onerous task. The legal test is an objective one: Did the employee stand “idly or unreasonably by” as their financial losses accumulated, or did they try without success to obtain other employment?
Not surprisingly, the duty to mitigate is generally an important factor in severance package negotiations between employers and employees. If an employer can successfully argue the employee failed to mitigate their losses following their termination of employment, it would help them minimize the compensation owed to the employee (i.e., the financial value of the severance package).
Example of the Duty to Mitigate
Assuming an employee is successful in a wrongful dismissal claim, a court would generally first determine how much severance compensation the employer is required to provide the employee. This requires determining what the employee’s reasonable notice period is (see here). Next, the court would calculate how much money the employee would have received over the time period by adding up all of the employee’s usual compensation (e.g., salary, bonus, health benefits, pension plan contributions, etc.). Then, the court would subtract any post-termination payments the employer made to the employee, as well as any income the employee earned from another job during that time period. Finally, the court would award the employee the difference between these amounts (referred to as “wrongful dismissal damages”).
Contact Employment Lawyer
Despite the context of the current economic downturn, employees who are dismissed from their jobs still have a duty to mitigate their financial losses, which will continue to play an important role in employment disputes, including severance package negotiations, wrongful dismissal and constructive dismissal claims. As such, it is important for both employers and employees to understand their respective obligations – for employees, to make reasonable efforts to obtain new employment, and for employers to provide a severance package that takes into account the employee’s duty to mitigate.
No matter which side you happen to be on – an employee who was recently terminated from your employment, or an employer who is unsure how to handle a wrongful dismissal matter – feel free to reach out to Bune Law at 647-822-5492 for guidance from an experienced employment lawyer.
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