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Can The Wrongfully Dismissed Employee Mitigate by Establishing A Business?

As an employment lawyer, I have an obligation to explain the concept of mitigation to my clients who have been wrongfully dismissed. The suddenly unemployed cannot just sit out the notice period and collect severance. They must try to reduce their losses by seeking a new source of income. The income earned during the notice period is usually deducted from the severance pay they were entitled to. But what does the obligation to mitigate entail? Must the unemployed accept a minimum wage job or can they hold out for a job that is commensurate with their experience and education? Can the unemployed retrain for a different type of job by going back to school? Can they start their own business? With respect to mitigating by establishing a business, the law appears to favour the employee's right to do so, and this despite the start-up costs and turn-around period for profitability. In some cases, the courts have made the former employer pay for the business start up costs. This blog post explores caselaw dealing with the employee's right to mitigate by starting a business

An employee may reasonably mitigate wrongful or constructive dismissal damages by establishing a new business. What is reasonable depends on what other options are available to the dismissed employee at the relevant time. This can include his or her age and expertise, attempts to secure other employment, suitable alternative employment, and market conditions.

It has been stated that self-employment should be viewed as a "last resort" means of mitigation. Justice Whitten in Allan v Westinghouse Canada Inc. stated that self-employment is problematic because of the start up costs and the employee is unlikely to earn the income he or she earned at termination until the business becomes established. However, the view that establishing a new business as a "last resort" means of mitigation is not a view held unanimously. In Brdlik v Comtech Group International Ltd., the court concluded that there is no obligation upon a dismissed employee to first conduct an unsuccessful search for new employment prior to establish his or her own business.

Previous cases indicate that it is now well established that an individual can properly start his or her own business in order to mitigate damages when dismissed from employment. A case that supports this position is Hillhouse v Alexander Consulting Group Ltd. The plaintiff was terminated as a pension consultant and four months later, the plaintiff concluded that there was no suitable alternative employment. The plaintiff then established his own business and operated at a loss for the first six months, and the Ontario Court of Appeal found there was no failure to mitigate his damages. More recently, in Peet v Babcock & Wilcox Industries Ltd., the employer argued that an employee had failed to mitigate when he established a new business. The Ontario Court of Appeal rejected this argument and stated:

The respondent's establishment of a new consulting business was clearly a means of mitigation. The fact that the early years of the respondent's self-employment did not live up to his monetary expectations does not mean that this was an unreasonable attempt at mitigation. An employee who has been terminated is entitled to consider his or her own long-term interests when seeking another way of earning a living.

Incorporation costs associated to starting a new business may also be recoverable as mitigation expenses, as seen in the case of Leduc v Canadian Erector Ltd. The court stated that in an era when the competition for jobs is ferocious, the plaintiff should not be faulted for doing anything that might reasonably be viewed as an attempt to improve his competitive position in the marketplace. The Ontario court agreed with Alberta's Court of Appeal in Christianson v North Hill News Inc. where the appeal court stated:

All that the plaintiff need do is to make what at the time is an objectively reasonable decision; he or she need not make the best possible decision.

Furthermore, losses incurred by setting up a new business may also be recoverable. In Rooney v Reed Ltd., Justice Southey stated:

As a result of the steps taken by the plaintiff, all of which seemed to me to be reasonable, to mitigate his loss upon the termination of his employment, the plaintiff sustained a loss in the operation of his newly-formed consultancy firm of $320.00. This loss includes nothing for remuneration to the plaintiff during the period, but rather was a loss in expenses incurred by him in setting up the company and promoting it. In my judgment the plaintiff was under an obligation to take steps to mitigate his damages, and if those steps, even though reasonable, resulted in further loss to him, he is entitled to recovery.

If the courts are bound by the decision in Rooney, then the plaintiff is entitled to be compensated for losses incurred by incorporating a new business.

Establishing a new business also applies to opening and operating a franchise. In the recent 2015 case of Leeming v IBM Canada Ltd., the plaintiff worked for a company called DWL Incorporated ("DWL") ever since April 25, 2005. Shortly after, DWL was acquired by IBM on August 15, 2005. After eight years of employment, IBM terminated her position. The plaintiff then decided to open a franchise business, which was not profitable. Despite this, the court accepted the plaintiff's evidence that she mitigated her damages by making reasonable and diligent efforts to find new employment, and that training herself for her new career as a franchisee was reasonable.

To reach the author of this blog, Jean-Francois Lalonde, email jflalonde@viceandhunter.ca or call 613.232.5773 x 246.

Jean-Francois Lalonde is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Vice & Hunter LLP. He has extensive experience practicing in the areas of employment law and is a part-time professor at La Cité Collégiale teaching Employment Law for Paralegals.

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