Ontario Court Holds Employer Must Pay Over 3 Years of Severance Under Fixed Term Contract

In its recent decision, Howard v. Benson, the Ontario Court of Appeal dramatically increased the potential severance liability for employers using fixed term employment agreements by holding that the employer must pay compensation over the full balance of the term with no reduction for re-employment income earned by the employee.

In Howard, the plaintiff was hired as a Sales Development Manager for an automotive service centre under a five year fixed term contract.  The employer terminated the contract without cause after only 23 months of service.  The contract contained an early termination clause that purported to allow the employer to terminate at any time on Employment Standards Act minimum notice.  However, at trial, the wording of the clause was held to be too ambiguous to be enforceable.  The trial judge went on to award severance based on common law reasonable notice.

The two issues on appeal were: 1) whether damages should be based on the balance of the term rather than reasonable notice, and 2) whether the duty to mitigate (i.e. to seek alternate employment) and deduction of mitigation earnings applied. The Court had no difficulty applying prior case law to rule that where a fixed term contract is terminated early with no valid early termination clause, the employer is potentially liable for compensation over the balance of the term—no matter how long.  However, on the second issue, the Court departed from the long established general contractual principle that the victim of an wrongful early termination of a fixed term must still use reasonable efforts to look for comparable employment (aka “mitigating damages”) to minimize the loss of income and that any re-employment earnings during the balance of the term would reduce the employer’s severance liability.

This decision extended the ruling in a 2012 decision, Bowes v Goss Power Corp. which had held that where an indefinite hire contract contained a termination notice clause allowing for termination on “6 months’ notice or pay in lieu” and the employer terminated without working notice, there was no duty to mitigate damages or deduction for mitigation earnings. Instead, the employee was entitled to receive the full 6 months of pay as damages despite being re-employed within weeks of his dismissal.

What does this mean for employers?

As noted above, the Howard decision departs from the long established general contractual principle that the innocent victim of an unlawful early termination of a fixed term contract still has an obligation to mitigate damages. That principle has important economic benefits, effectively requiring terminated employees to seek out and take comparable productive employment elsewhere rather than sitting back and collecting severance.  It also potentially reduces the cost to employers of terminating employees under fixed term contracts before the end of the term. Economists argue this may be the economically efficient thing for a company to do in a variety of scenarios, e.g. where the employee is not sufficiently productive or the company needs to restructure.  Requiring mitigation reduces the cost to the company of taking that economically necessary decision.

Practical tips

It remains to be seen whether this case will be followed outside Ontario. In B.C. there are two decisions of the Court of Appeal to the contrary.  However, to minimize the risks of being forced to pay severance over a lengthy contractual fixed term when terminating early, employers should:

1.Only use fixed term contracts sparingly where truly required for business reasons. Long fixed terms are to be avoided in particular;

2. Always include a well-drafted enforceable right to terminate prior to the end of the term; and

3. Ensure that the agreement expressly imposes a duty to mitigate on breach. The same advice applies to termination clauses that allow termination on defined notice “or pay/compensation in lieu”.