Wednesday, March 19, 2014

Ontario Court of Appeal Says Duty to Mitigate Only Triggered After Dismissal

There's a very interesting case out of the Ontario Court of Appeal, Farwell v. Citair, Inc.  Hat tip to @LancasterCanada for tweeting about it.

In many ways, it's a typical Mifsud-type constructive dismissal case:  Mr. Farwell was a senior and long-service employee, and he was transferred to a different position - it was effectively a demotion to a position he had held many years earlier.  He refused the demotion and took the position that he had been constructively dismissed.

Farwell was found to have been constructively dismissed, and awarded 24 months' pay in lieu of notice.

Citair argued that, despite the constructive dismissal, Farwell was obligated to mitigate his losses by accepting the newly offered position:  Essentially, that the absence of an atmosphere of hostility, stigma, or loss of dignity meant that he had no excuse not to stay.  The trial judge found otherwise, but there is some reason to think that there may have been subjective considerations informing the analysis, whereas the test is actually objective - not whether Farwell felt that there would be stigma, but whether a reasonable person would have felt that there would be stigma.  (Put another way:  Was Farwell's perception of stigma 'reasonable'?  It's a question that it isn't entirely clear the trial judge considered properly.)

So it's conceivable that the Court of Appeal may have allowed the appeal and sent the question back down for a trial of that issue, if it were just that.

But the Court of Appeal dismissed the appeal and upheld the trial decision on a different basis:  The duty to mitigate is only triggered after the termination event.  The termination occurred in this case when he refused the demotion and took the position that he had been constructively dismissed, and there was no clear offer of re-employment after that time.

Why is this important?

In this case, the general issue of constructive dismissal mitigation intersects with the 'timing' issue I've addressed on a number of occasions recently.

There have been a number of cases where employees have been offered modified terms of employment, have refused, and have then been dismissed.  In the Silva v. Leippi case, the British Columbia Court of Appeal considered such an individual to have failed to mitigate - Silva's employer was selling the business, the new business owner offered a position to Silva, Silva tried to negotiate terms, and the new owner decided "We don't want this guy after all", and he was then dismissed.  The BC courts felt that Silva had failed to mitigate by not accepting the offer from the new owner.  Which seemed strange to me.  I remarked about that case while discussing the Bannon v. Schaeffler case from the Ontario Superior Court of Justice, which was similar:  Mr. Bannon was offered a demotion to his old position, which he didn't feel he was able to perform anymore, so he refused.  He was then dismissed.  The court felt that his decision was reasonable in the circumstances, and awarded pay in lieu of notice, but rejected any notion that the duty to mitigate wouldn't have been engaged otherwise, because the contract had already been 'effectively repudiated'.

This doctrine seemed very odd.  It's well-established law that an employee faced with a unilateral change by the employer to fundamental terms of employment has three options (aside from simply acquiescing):

  1. Subject to the duty to mitigate, the employee can treat the contract as having been terminated, and seek pay in lieu of notice.
  2. The employee can make it clear that he is not accepting the change, but stay in the position to mitigate his damages and sue the employer for any additional losses.
  3. The employee can reject the change outright.  In that case, the ball is in the employer's court:  The employer can dismiss the employee, or can continue to employ the employee on the same terms as before.
The third option isn't practically available in all scenarios, but it's really the one we dealt with in Bannon.  The Silva issue is even more troubling, because that's a common scenario when selling businesses.  The problem is that mitigation is a doctrine which addresses breach of contract (or tort, but that's unrelated) - there is no duty to mitigate until and unless the contract has been breached.  On first principles, there's simply no basis for saying that Mr. Silva had an obligation to mitigate at the time of the negotiations with the purchaser, nor that Mr. Bannon had a duty to mitigate when asked to accept a demotion, because there's no basis for saying at that point that the employer had already repudiated the contract.

In discussing the Loyst v. Chattens appeal recently, I suggested that the Court of Appeal's findings there were more in line with my argument - that Silva v. Leippi is not good law in Ontario.  After all, Loyst was the same "third option" kind of case as Bannon:  Chattens asked Loyst to accept changed terms of employment; she refused; she was dismissed.  The employer argued failure to mitigate, and the Court of Appeal rejected the argument on the basis that Chattens took away the opportunity to stay in the workplace by firing her.

Farwell makes that even clearer:  Mitigation duties are only triggered by the termination event.

But does it make sense here?

It still seems a little strange to me, though, because it does not appear to me that Farwell is a 'third option' case.  It looks like Farwell chose the first option, treated the contract as being terminated, and sought pay in lieu of notice.

It looks like the Court's guidance to employers is this:  If you transfer an employee, and they refuse and claim constructive dismissal, you're supposed to make a formal offer of employment in the modified position.  Kind of jumping through hoops.  And I'm not sure it's appropriate here, because when the employee chooses option 1, it means that he's taking the position that the contract has already been breached, and that lost income flows from the actions already taken by the employer.  It makes all the sense in the world to me that the duty to mitigate would be triggered in such a scenario.

On the other hand, there are practical realities in play, which the courts don't typically recognize, making option 2 undesirable for most employees:  Is it really practical to continue an employment relationship with an organization that you're suing?  So if the option is really on the table to continue the employment relationship after the employee has called out the employer and threatened to sue on its breach of contract, maybe it really should be incumbent on the employer to make an express offer before it can say that 'not coming to work was a failure to mitigate'.  Require the employer to hold out an olive branch, as it were.

Farwell is a big change to the terrain of constructive dismissal, requiring - for the first time - active steps by an employer to be able to avail itself of the mitigation argument which has been so effective in recent years.

With good legal advice at the outset, it's not a big hurdle to overcome, however.

On another note, I should say that the fact pattern in Farwell highlights some of my concerns with the application of the Mifsud doctrine generally:  Mitigation is typically a low threshold.  If I'm dismissed from my executive-level position, I'm entitled to look for another executive-level job.  I don't have to look for middle-management positions, nor do I have to accept one if it's offered to me.  Which is precisely what happened in Farwell:  There is no way that Farwell would have been expected to take that position with a different employer, and yet it turns out to be a close case when it's being offered by the organization which repudiated his contract in the first place.  Seems odd, no?


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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