An Employee’s Failure to Mitigate Reduces Severance Pay
Once an employee’s job is terminated, they are usually entitled to receive a financial severance package from their employer. Contrary to common misconceptions, severance pay is not intended to punish an employer for terminating the employee’s job. Rather, it is intended to act as a financial ‘cushion’ to help smooth the employee’s transition to new employment.
How Do You Calculate Severance Pay in Ontario?
To determine how much severance pay a non-unionized employee is owed from the employer, the courts consider a few key factors, including:
- if the employee was terminated “for cause” or “without cause”
- if they signed a legally enforceable employment contract
- employee’s age, years of service, position and the availability of similar employment, relative to their knowledge, skills and experience
If the employee was dismissed “without cause,” and they have otherwise not signed a valid employment contract limiting their amount of severance pay, they may be entitled to “pay in lieu of reasonable notice” under common law (this refers to court decisions that have established rules the courts must follow in making decisions involving similar disputes.)
In most cases, an employee’s entitlement to full severance pay under common law far exceeds their minimum entitlements in an employment contract or minimum standards legislation. To calculate an employee’s severance pay, the courts take into account the following main factors (along with many others developed over time):
An Employee’s Duty to Mitigate after Termination of Employment
Under Ontario employment law, terminated employees are expected to mitigate their damages by taking reasonable steps to actively search for new employment. The standard of an employee’s job search efforts is “reasonable” – not perfect. In other words, the duty to mitigate requires “more than creating a resume and conducting computer searches.”
The requirement for an employee to “mitigate” (reduce) the financial impact of losing their job is significant in wrongful dismissal cases (and a point of contention between employment lawyers in severance package negotiations and wrongful dismissal claims). Put simply, if the court were to find the employee found a comparable job within their reasonable notice period (or alternatively, failed to put reasonable efforts to mitigate), it could reduce the amount of severance pay the employee would be entitled to if successful in a wrongful dismissal case.
So what is an employee expected to do to fulfill their duty to mitigate following a termination of employment? One recent court decision provides some general guidance:
- Employees should not limit a job search to exactly the same job, industry. Rather, employee’s are reasonably expected to look for a reasonably comparable job that matches their educational, skills and experience review (even if it means applying for jobs with different titles or transitioning to another industry)
- When searching for alternative employment, one must take active steps to search for reasonably similar employment including: reaching out and connect with contacts in their network or potential employers; writing relevant cover letters; using headhunters (recruiters); and following-up on job applications, and so on.
As noted earlier, if an employee is found to have not proactively searched for alternate employment (mitigate), such as unreasonably limiting their job search to nearly identical employment in the same industry, or not applied for a reasonable amount of jobs, the court would consider reducing the employee’s notice period.
For instance, in a recent court case called Lake v. La Presse (2018) Inc., 2021 ONSC 3506, the court reduced an employee’s severance pay entitlement from 8 months to 6 months because it found the employee failed to take reasonable steps to mitigate her damages. In that case, the 52-year old employee’s employment terminated without cause after 5.5 years of working for the employer as its general manager. To justify reducing the employee’s severance pay entitlement, the court relied on the following factors:
a. She waited too long before applying for any jobs (while the employee is allowed to take about 1 month to recover after losing their job, this employee waited for over 2 months to begin her job search);
b. She aimed her job search “too high” – while there was nothing wrong with her having applied for Vice President roles, she should have also been applying for less senior roles as well, such as General Manager or Sales Representative if she continued to remain unemployed; and
c. She applied to very few jobs.
As a result, the court made the following comments that employee’s should keep in mind as to how the courts will scrutinized their mitigation efforts even if they succeed in a wrongful dismissal case entitling them to severance pay:
“In these circumstances, I infer that, had the plaintiff expanded the parameters of her job search, searched earlier, and applied for more positions, her chances of obtaining a position would have improved significantly. Although there is no direct evidence in front of me of other positions that the plaintiff could have applied for, I find it is reasonable to assume that they existed. If vice president roles were available, more junior roles were also available. The plaintiff chose unreasonably to limit her job search, which had a corresponding impact on her ability to find work. (paras. 68 and 69)
In my view, a two-month reduction in the period of reasonable notice is appropriate to account for the plaintiff’s failure to take reasonable steps to mitigate her damages.”
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While the general rule is that employers must pay employees severance pay for a wrongful dismissal claim, they may have good reason to seek a reduction of how much they must pay the employee if they can prove the employee failed to take reasonable steps to mitigate their damages (and therefore contributed to their own inability to re-employ sooner). This basically involves an employment lawyer (or the court) determining whether the employee’s job search efforts were “passive, limited and unduly narrow,” including by considering:
- did the employee apply soon enough after losing their job (keeping in mind employees can wait about 1 month to adjust to their new circumstances, before having to begin their job search in earnest)?;
- did the employee apply for an adequate number of comparable jobs?; and
- did the employee prolong their job search by not applying for suitable positions, considering their education, skills and experience (e.g., restricting the location or salary of jobs applied for)?
Contact Bune Law Employment Lawyer
Whether you are are an employer or employee, please contact Bune Law at 647-822-5492 arrange a consultation with an employment lawyer in the Toronto area to discuss your employment matter, such as a wrongful dismissal claim or severance package review and negotiation.
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