Wednesday, September 23, 2015

Another Court Applies 'Trust and Accounting' Method

There are an increasing number of wrongful dismissal cases going to a summary judgment motion before the expiration of the notice period, which raises the question:  How do we address 'mitigation' for the period yet to pass?

I've addressed the issue a number of times before, most recently this past July.

There's a bit of a schism in the law.  A couple years ago, in Bernier v. Nygard, Justice Morgan awarded pay in lieu of 18 months of notice to an employee, only 7 months after the dismissal, but impressed the award with a trust, meaning that if Bernier got a new job, he would owe money back to Nygard.  (The Court of Appeal upheld the approach as being open to the motions judge.)

Earlier this year, Justice Pollak ruled in Markoulakis v. SNC-Lavalin that the employee was entitled to 27 months of notice, but only 9 months had passed since the dismissal.  Justice Pollak opted for the 'partial summary judgment' approach, awarding damages only based on the time that had already passed at the summary judgment date (which were basically nil, given the initial package the plaintiff had received).

Shortly thereafter, Justice Perell decided the case of Paquette v. TeraGo.  Mr. Paquette's reasonable notice period was 17 months, and there were 10 months left to go at the summary judgment date.  Justice Perell applied the 'trust and accounting' approach as in Bernier, but went a step further, categorically rejecting Justice Pollak's 'partial summary judgment' approach as "cynical, patronizing, unfair, and expensive."  (I would add 'wrong' to the list of adjectives.  More below.)

Last week, Justice Hood, a very recent appointment to the bench, decided a similar issue.  A 39-year-old 'parts administrator' with 17 years of service was dismissed, because technology made her position redundant.  On the facts, Justice Hood awarded a notice period of 14 months - very close to what the plaintiff sought.

It's always interesting to look at a new judge's first impressions of employment law.  Justice Hood, as a lawyer, was a civil litigator with a focus on corporate/commercial litigation, and appears to have had relatively little exposure to employment law principles in his practice.  When there were stacks of case law supporting different positions on the notice period put before him, he felt the need to remark upon it.
[12] As pointed out in Paquette at para. 25, the determination of a reasonable notice period is an art not a science. As a result most cases yield a range of reasonableness.
[13] This is apparent from the cases relied upon by both the plaintiff and defendant and the charts put together by each party in their respective factums. The plaintiff refers to 10 cases with what she argues are employees with similar positions, length of employment, age and salary as her where a range of 13 to 18 months was awarded. She submits therefore that 15 months is appropriate. The defendant refers to 4 cases, with what it argues are similar factors as the plaintiff’s situation, where 10 months was awarded. It submits therefore that 10 months is appropriate. I expect the defendant could have found an equal number of cases as the plaintiff if pressed. I do not consider the number of cases presented as relevant to the determination.
He went through a detailed analysis of the applicable principles, and it's a good analysis.

He referred to the Court of Appeal's statement in DiTomaso that the character of employment is of 'declining importance', and highlights that on the facts of this case, that the plaintiff's skill set has been made obsolete by technology actually makes her more vulnerable, and potentially makes it more difficult for her to find employment.  Makes perfect sense to me.

Her relative youth should improve her employability, but her long period of service tends toward a longer notice period.  As well, she led evidence that she made "numerous" job applications, but only received one interview, which Justice Hood felt indicated "there is a limited availability of similar employment."

And Justice Hood also followed Justice Perell's remarks about the relevance of an economic downturn.  "I believe I can take judicial notice of the general economic downturn in the GTA and Southern Ontario for the first half of 2015."

This served as a factor extending the notice period.  It's not a unique or unusual treatment these days, but it brings into focus just how much employment law has shifted over recent decades - there was a time when courts regarded a weak economy as not being a reason to increase the notice period, while poor financial circumstances of the employer was a reason to decrease the notice period.  (Not to say that this doctrine is totally dead:  Justice Lederer recently remarked that "the law does not ignore the dilemma of the employer".  But I find the context and decision he made on that point to be strange.  A commentary for another time, perhaps.)


Having decided on a notice period of 14 months, and with the motion being heard only 6 months after the dismissal, the mitigation approach needed to be considered.

The defendant argued that the 'trust and accounting' approach would disincent the plaintiff, who had a sick stepmother and three children, from seeking new employment for the remainder of the notice period.

Yes, they argued that.  We should leave her without any means of providing for her family or ailing stepmother for another several months, to encourage her to take a new job.  Justice Hood didn't call them out on it.  I will.  Later.

Justice Hood considered a few factors, including her mitigation diligence to date and the existence of other incentives to get back into the workforce.  In light of the fact that her salary wasn't high and the amount of the notice period left outstanding is just a few months, it would be unduly expensive to apply the 'partial summary judgment' approach.  While not repeating Justice Perell's condemnation of that approach, he nonetheless closely followed Justice Perell's approach, clearly expressing that there is a court-imposed constructive trust upon any mitigatory earnings made during the notice period.  (Note:  Not on the damages themselves.)

Commentary:  No Room for the Partial Summary Judgment Approach

This is a very good decision, on the law.  If I'm correct that Justice Hood had relatively little exposure to employment law before, he certainly paid attention to the applicable legal principles in coming to this decision.

But I've alluded before to my belief that the partial summary judgment approach is simply incorrect at law, and I'll take this opportunity to elaborate on that.

I don't pretend that the 'trust and accounting' approach is perfect.  It does have the impact of removing the incentive on employees to mitigate.  But that's seldom enough a successful issue at a trial for an employer, and it's probably something that one can reasonably anticipate at the summary judgment stage.  I predicted in my Bernier commentary that adequacy of mitigation efforts to date will be a factor in deciding the approach, and Justice Hood appears to have regarded it as such.  (I might suggest that the question is properly considered in context of the 'issue requiring a trial' analysis.  Which is complex, and not important to my core point here.)

Trust and accounting is a good, but imperfect, solution to a very difficult problem.

Whereas partial summary judgment is fundamentally premised on a misapprehension of the role of mitigation in wrongful dismissal law.

Damages Are Assessed at the Dismissal Date

Assume for a moment that I am an employee who is entitled to reasonable notice of dismissal, for the sake of argument, in the amount of 12 months.

To comply with the contract, the employer is supposed to give me 12 months of actual notice, giving me a notice to inform me that, effective 12 months from today, I will no longer be employed.  No need for a payout (well, not always), and no room for a mitigation analysis.

If I am dismissed without notice today, and without just cause, then that is a breach of contract.  And my damages are generally going to be immediately calculable - the value of what I would have received had I worked through the reasonable notice period.  (There are exceptions, where a value can't be calculated immediately.  Stock options, formulaic bonuses based on the employer's year end numbers, disability claims which may arise after benefits are discontinued, etc.  But in general, the numbers are pretty close to fixed on the date of the dismissal itself.)

Remember, pay in lieu of notice is not really a 'thing'.  It's shorthand for damages said to be suffered by reason of the termination without notice.

I am presumed, at law, to have suffered these damages.  If one supposes that I actually became unable to work the next day for medical reasons, and would have actually spent the year on an unpaid sick leave, then that doesn't matter.  Interest on the whole amount usually starts to accrue immediately.  I don't need to worry until my statutory minimum payment runs out before I can commence an action.  Based on the fact of dismissal alone, I can prove breach of contract, and I can prove damages.

But, and this is very important, I do not need to prove mitigation efforts to be entitled to recover damages.  Proving failure to make reasonable mitigation efforts, or proving actual mitigation, is the burden of the defendant employer.  (I fleshed this analysis out a bit more in discussing the Garcia case last year.)

To say "damages aren't proven until the plaintiff can show he didn't get a job through the notice period" would fundamentally alter the nature of wrongful dismissal damages, and of contractual expectation-based damages in general.  In essence, it turns mitigation into part of the cause of action, which would lead to all sorts of weird effects - causation issues (was it really the termination the deprived me of income, or just poor economic circumstances, or my own obsolete skill set?); a shift in the burden of proof (I'd need to prove not only that I didn't get a job, but also that I reasonably couldn't have - a burden which currently rests on the employer in the inverse, and is a heavy burden at that); etc.

In the correct analytical framework, the Court is called upon to determine whether or not the plaintiff has satisfied its burdens to establish breach and damages, and assesses damages accordingly, and then inquires into whether or not those damages should be reduced as an effect of mitigation.

Justice Perell was cognizant of these principles - hence why he clarified that the trust applied not to the award of damages, but rather to any mitigatory earnings.  It isn't that mitigation reduces damages; mitigation earnings are applied against damages.

Hence, if I hypothetically got into court the day after a wrongful dismissal, I would be immediately able to prove damages through the entire notice period.  There is no principled reason for a judge to grant summary judgment only in respect of the portion of the notice that has passed, as is entailed in the partial summary judgment approach.

The Partial Summary Judgment Approach Misapprehends the Nature of Summary Judgment

The point of the summary judgment process is simply this:  If an issue doesn't need a trial, it should be resolved without a trial.

If the evidentiary record is incomplete, or reveals disputes that a trial is necessary to resolve, then motions court will order a trial of the issue.

But refusing judgment in favour of a "wait and see" approach?  It is inconsistent with the objectives of the Summary Judgment rule.

What if we weren't talking about summary judgment motions?  What if a case moved with unusual speed, and ended up in a full trial before the end of the reasonable notice period?  (It's improbable, but not impossible.  It could happen.)  You couldn't grant 'partial judgment'; you couldn't order "wait and see"; the court would need to fully and finally adjudicate the issues in dispute.

There would be only two avenues open to a trial judge, faced with such a quandary:  Trust and accounting, or contingency reduction (more below).

Thus, in the absence of a material dispute requiring a trial for resolution, there's no basis for a court to not grant full and final judgment.

Partial Summary Judgment Renders Injustice

In this case, the plaintiff had young children, and a sick step-mother.  The employer thought that these were disincentives for the plaintiff to find work if she got income replacement damages anyways.

She had possible commitments on her time (which arguably might have actually justified a 'failure' to mitigate, in light of the statutory provisions for family medical leave).  And, probably, significant financial obligations.

It is one of the core injustices of wrongful dismissal law that the non-breaching party - the plaintiff employee dismissed without notice - is very often in financial dire straits as a result of the termination, and thus in a weakened bargaining position, forced to accept a small bird in hand rather than pursue the two in the bush to which she is entitled.  The cost of litigation is often an impediment to pursuing one's rights, but the "law's delay" (one of Hamlet's many grievances) creates problems for dismissed employees, many of whom live hand-to-mouth, and require income continuity in order to satisfy their various financial obligations.

I have seen desperate employees take new jobs of far less prestige and income than that from which they were dismissed, because they have bills to pay.  The employer had no right to expect the employee to take that job in mitigation, but is entitled to count the earnings as 'mitigation earnings'.  Meaning that the employer benefits significantly from the employee's desperation.

The plaintiff in this case ought to have received continuous income over a 14 month period.  That was her contractual entitlement.  And then the employer - the party which breached her contract in the first place - proceeds to argue that, she should be forced to actually live without the income to which she is keep her motivated.  The inhumanity of it is striking.

The employer is entitled to expect her to act as a reasonable person would, in her search for replacement employment.  Not as a desperate person would.

And the facts here are not particularly exceptional.  It is generally true that a dismissed employee will be in a more difficult financial position than the employer which dismissed her.  Given that, and given that it was the employer in the first place who committed the breach of contract, it makes little sense that the employee should be the one expected to bear the hardship of unnecessary delay.

The Problems of Disincentives are Small

While I have acknowledged the problem - even in my discussion of Bernier two years ago - that the trust and accounting method effectively relieves the employee of the obligation and incentive to mitigate, the problem is not large.

Employers are relatively seldom successful in proving 'failure to mitigate', and even when they do, it's not usually a large discount.  It isn't a high standard for the employee in the first place.  If an employee can walk into court after several months and show a strong record of mitigation efforts, then that record can often be considered on its own merits.  An employee who attacks the job hunt in good faith will still have incentives to get back into the job market asap, in most cases, and it's unlikely that they will stop altogether because of a judgment.  With a strong mitigation record for the earlier months, and even a weak mitigation record in the later months, it would be unlikely that an employer would achieve a meaningful discount to the award.

In the closer cases, where the employee's mitigation record is more questionable, there may be reasons to take other approaches.  One option, in truly borderline cases, is for the judge to determine that the evidence on the record doesn't provide a full appreciation of the mitigation issue, and therefore that a trial of the issue is needed.  The other approach, which Justice Pollak acknowledged as a possibility but which neither counsel argued for, is the contingency reduction approach.

And I think the contingency reduction approach needs to get a little more consideration than it has in the last couple of years.  I'm not aware of any wrongful dismissal cases in Ontario where it has been taken, but it isn't altogether unheard of in Canadian employment law.

But they're ubiquitous in personal injury law.  Suppose that the expectation is that you'll never work again, so you get a lifetime of income replacement damages...except that there's a chance you might recover more than anticipated, so there's a fairly arbitrary discount applied to your damages on that basis.

Courts in other Provinces have contemplated contingency reductions in wrongful dismissal cases on a not-so-irregular basis, but such awards are, in fact, very rare, and usually quite modest.  And there are reasons for that.

Firstly, the reasonable notice period actually integrates relevant considerations to the contingency reduction:  Essentially, when asking what the reasonable notice period is, we're asking 'how hard will it be to obtain replacement employment?' or 'how long will it take to find replacement employment?'  While there certainly are cases where employees obtain new employment within the reasonable notice period, the reality is that the assessment of the notice period itself actually builds in an assessment of the probabilities.

Secondly, a reduction would tend to be a low percentage of what's left in the notice period.  In this case, with 7 months left in the reasonable notice period, a 10% reduction (for the sake of argument) would amount to about $2800, on a notice period worth about $56,000 altogether.  The assessment of the reasonable notice period itself is an imprecise science, and such a modest difference falls well within reasonable margins of error.  It's a de minimis issue in such cases, and considering its inherent arbitrariness, it would be a relatively rare case where it became important to assess such a reduction.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation.  If you need legal assistance, please contact him for information on available services and billing.

1 comment:

  1. Good post - like your commentary on mitigation. Its a standard defence tactic expected of any employer side lawyer.

    Seperately, interesting case out of Alberta on limits of discretionary powers of employers in cases of LTIP tied to "active employment".
    Styles v Alberta Investment Management Corporation, 2015 ABQB 621 (CanLII)