A recent Ontario Court of Appeal decision provides a useful road map for employers and their advisors regarding the deductibility of various incomes that wrongfully dismissed employees could earn during their statutory and reasonable notice periods.
In a wrongful dismissal action, an employer is generally entitled to a deduction on income earned by the dismissed employee from other sources during the reasonable notice period. In Brake v. PJ-M2R Restaurant Inc., 2017 ONCA 402, the Ontario Court of Appeal reaffirmed that not every mitigation income is subject to deduction. It reminded that statutory entitlements are not damages and not subject to mitigation. The court also explained that neither an employment income earned during the statutory notice nor employment insurance benefits is deductible from wrongful dismissal damages. Notably, the court concluded that when an employee is forced to accept a substantially inferior position because no comparable position is available, the amount earned in that position is also not deductible.
In Brake, 62-year-old Esther Brake worked at various McDonald’s restaurants for more than 25 years. In 2004, McDonald’s promoted Brake to a restaurant manager, where she earned approximately $63,000 per year in total compensation. From 2000 to 2010, Brake received an overall rating of “excellent” in her annual evaluations. Following her reassignment to a more challenging location, in April 2012, McDonald’s rated her performance as “needs improvement” and placed her in its progressive discipline program. During the Aug. 2, 2012 meeting, Brake was told she failed the program and that she had a choice between a demotion to first assistant and dismissal. Brake refused the demotion, because it meant she would be reporting to a younger and less experienced man whom she trained and supervised. She left the meeting embarrassed and humiliated, and she never returned.
Subsequently, Brake sued for constructive dismissal and was awarded $104,499.33 in damages, representing 20 months’ compensation in lieu of notice, inclusive of statutory entitlements.
McDonald’s appealed, arguing that Brake’s refusal to accept the position as a first assistant amounted to a failure to mitigate and, thereby, disentitled her of damages. In addition, it asserted the trial judge erred in failing to reduce the damages award by the amounts Brake received during the notice period.
In dismissing the first ground of appeal, Justice Eileen Gillese found no palpable and overriding error in the trial judge’s conclusion that it would have been unreasonable to expect Brake to accept demotion and continue working for McDonald’s in an atmosphere of embarrassment and humiliation.
In respect of the deductibility of mitigation income, Gillese reminded that an employee who is dismissed without reasonable notice is entitled to damages for breach of contract based on the employment income the employee would have earned during the reasonable notice period, less amounts received in mitigation of loss during the notice period. This general statement of principle aside, Gillese refused to reduce the damages award by the amounts Brake received during the notice period because, in her view, they “were not amounts received in mitigation of loss.”
Dealing with the deductibility of EI benefits, Gillese observed that it is settled law that EI benefits are not to be deducted from the damages award because an employer ought not to profit from the benefits payable to an employee. In other words, it would be inconsistent to have the amounts Brake received by way of EI taken into account for the benefit of McDonald’s that, by its breach of contract, forced Brake to resort to EI benefits.
With respect to the deductibility of income earned during the statutory notice period, Gillese reminded that the statutory entitlements are not damages and, thus, are not subject to mitigation. Instead, these entitlements are minimum sums that are to be paid by McDonald’s even if Brake secured a new full-time job the day after her dismissal. By subjecting the statutory entitlements to reduction by reason of mitigation removes their character as “minimum.” Therefore, the income Brake earned during her statutory notice period is not subject to deduction as mitigation income.
While working at McDonald’s, Brake simultaneously worked as a part-time cashier at Sobey’s, a fact that was known to McDonald’s. Gillese refused to deduct the income Brake earned from Sobey’s during the reasonable notice period, because had she remained in McDonald’s employ, she would have continued to supplement her income through her employment at Sobey’s.
The court did not address a legal question as to when supplementary income rises to a level that it should be considered as a substitute for the amounts that would have been earned under the original contract and, accordingly, be deducted as mitigation income.
In her concurring judgment, Justice Kathryn Feldman opined that when a wrongfully dismissed employee can only find a much inferior position that is not comparable in either compensation or responsibility to the managerial position she held with the employer, the employee is entitled to turn it down, and if she does, the amount she could have earned is not deductible from the damages award. If she accepts it, the amount she earns in that position is not mitigation income and need not be deducted from the damages award.
This case highlights how the issue of deducting incomes always depends on the trial judge’s assessment of mitigation. The burden lies on the employer to prove that the employee has failed in her duty to mitigate and is by no means a light one.
Nikolay Chsherbinin is an employment and immigration lawyer and author of The Law of Inducement in Canadian Employment Law. He can be reached at 416-907-2587 or by visiting nclaw.ca.