Arbitrary Reductions for Failure to Mitigate

 I've remarked before about the practice of the courts looking at the failure of a dismissed employee to take reasonable steps to mitigate and then applying some discount to their entitlements on that basis, because they might have successfully mitigated - without necessarily being satisfied that the would have successfully mitigated.

This is problematic, because it's been a critical part of wrongful dismissal mitigation law for nearly fifty years that failure to mitigate is a two-stage test, with the onus upon the defendant to show:

1. That the Plaintiff failed to take reasonable steps to reduce their loss; AND
2. Had the Plaintiff taken reasonable steps, they would have successfully reduced their loss.

Outside of cases where the 'failure' is in actually turning down a position, the second stage tends to be a difficult test, requiring the employer to prove a hypothetical surrounding the availability of work for the employee. But it's supposed to be a high burden, because the defendant (who breached the contract) is looking to an innocent plaintiff to relieve the defendant of the consequences of its own conduct.

But the burden which lies on the defendant of proving that the plaintiff has failed in his duty of mitigation is by no means a light one, for this is a case where a party already in breach of contract demands positive action from one who is often innocent of blame.

In principle, this is supposed to be a civil burden, meaning that the defendant should be required to prove that it's more likely than not that the plaintiff could have obtained comparable employment at some (earlier) point through reasonable efforts. If the employer successfully proves that, then the employee's damages should end at the point it became 'more likely than not' that new employment would have been obtained. If the employer does not successfully prove that, there should be no reduction.

In practice, what we tend to see is something more akin to the recent decisions in Humphrey v Mene, where "The employee was too slow starting to seek replacement employment" results in some reduction, without much thought on the likelihood of finding work in that period.

There's a recent decision from BC that really brings out this issue, Zoehner v. Algo.

Zoehner

Doug Zoehner was the 44.3% owner of the company. His brother Paul owned another 44.3%, and the balance was owned by their other brother Kerry.

Algo was broken down into two divisions - the Interconnect Division, run by Doug; and the Manufacturing Division, run by Paul. For most of the period under consideration, the only directors were Doug and Paul, and their working relationship was poor for some time leading up to the relevant time.

In 2019, the brothers agreed to sell the Interconnect Division. Doug's understanding was that this was a prelude to the sale of the rest of the company, and that he would continue to draw his salary until that sale. Paul's expectation was that, once the Interconnect Division was sold, Doug's active role in the company would be spent, so Doug would retire and no longer be entitled to his salary.

The disposition of the wrongful dismissal action itself is fairly straightforward, and - to my mind - right in principle: Algo argued that it was Doug who sold his own division, eliminating his own job, and therefore either resigning or abandoning his job. Of course, at law, it was Algo that did so.

In theory, Algo should have given Doug working notice, or the parties should have reached some other agreement as to how to handle Doug's employment. But in the absence of something like that, the fact that Doug stands among the shareholders and directors who sold part of the assets of the company doesn't relieve the company of its obligations to Doug qua employee.

As such, he entitled to pay in lieu of notice, with a 24-month notice period.

Mitigation

But here we come to the mitigation issue: Doug's entire working career had been with this family company, in a highly paid high-responsibility role. He was now in his 60s, in poor health, and requiring medication that reduces his mental alertness. So he decided not to seek replacement employment.

The Court found that this was a failure to take reasonable steps to mitigate - that step one of the RDC test was satisfied. (So far, so good; I have no concerns about this analysis.)

The Court also went on to consider whether or not he would have found comparable employment...and found that he would not have.

It is quite unlikely that any employer would hire the plaintiff for a senior executive position paying anything like the salary he previously earned. Such jobs generally involve highly specialized services, with heavy demands and responsibilities. An older employee on the brink of retirement with significant health issues is not likely to obtain such employment.

Again, this analysis is sound.

However, the Court took a further step and found that he should have eased into retirement - that he might have been able to find lower-paying work had he tried. Therefore, his entitlement was reduced by 20%.

This strikes me as an error in principle: While strictly the wages associated with the position are not necessarily what makes one role 'comparable' to another, so saying he could have found 'lower earning' work is not the same as saying he could have found 'non-comparable' work, it's fairly clear on the reasoning at the second stage of RDC that it's not just the high wage that excludes him from finding equivalent work, but rather the level of specialization, and the high demands and responsibility.

Reducing an employee's entitlements for failing to seek and obtain lower responsibility work is incompatible with the principles of mitigation in employment law.

Mitigation Calculation

But there are further issues with calculation. On these particular facts, the reduction is $140,000. It's not clear how this 20% figure was arrived at, either, given that the court was explicitly talking about lower-earning roles - when the Court thinks he would have gotten a job, and how much the Court thinks he could have earned from a new job that he might reasonably have obtained.

When summing up the applicable principles of the second stage of RDC, Justice Verhoeven describes it like so:

The second aspect, whether the loss could have been avoided had the plaintiff taken the reasonable steps that he failed to take, involves a consideration of hypothetical past events, and therefore must be weighed and assessed according to its relative likelihood, provided the possibility is real and substantial.

The approach to the "real and substantial" possibility is doctrinally dubious, but it's a pretty accurate way of capturing the 'arbitrary reduction' approach: There's a very short line of (BC) case law using that language in wrongful dismissal settings, which is directly, closely, and (in my humble opinion) improperly derived from personal injury case law.

There's a lot of consideration in PI law about how to deal with future contingencies: Often, you're dealing with presumptively-permanent injuries - sometimes, a condition that may deteriorate further in the years to come and cause further losses than provable at the time of trial; sometimes a permanent disability that appears to preclude working but with some prospect of a partial recovery.

The "real and substantial" language is used in these cases in BC to describe a different threshold than 'balance of probabilities'. It's occasionally used outside BC, too, and the concepts - at least dealing with future hypotheticals - appear generally sound: If there's a threshold degree of probability of some future contingency occurring, it calls for a semi-arbitrary modification to future damages to account for the likelihood of those future damages actually being lesser or greater than calculated at trial.

Importantly, even in those rare wrongful dismissal cases where we calculate reasonable notice entitlements prior to the end of the notice period, this is not typically the approach we use. It's one available approach, but other options like the "trust and accounting" approach or even the "partial summary judgment" approach are to be preferred, because of the relatively short periods under consideration.

However, where the "real and substantial" possibility test really appears to go off the rails is in the sense in which it is applied, in BC personal injury law, even to past hypothetical events.

I'm not going to comment on whether that's really appropriate in the PI context, but I will say that it's wildly out-of-step with anything in contract law.

In most contract cases (and tort cases, too, but let's not go there), the guiding question of damages is "what position would the plaintiff have occupied but for the breach"? It's ALWAYS hypothetical.

And, in fact, it runs deeper than that, because the general rule (with some exceptions) is that damages are calculated at the point of breach. So, for the most part, we look back to the point of breach to assess then-forward-looking hypothetical scenarios premised on the reasonable expectations of the parties. So, for example, if I'm wrongfully dismissed, and a week later I'm diagnosed with a rapid-progressing acute cancer and die shortly thereafter...my estate still gets paid out as if I'd worked the whole notice period.

As I said, it's a short list of cases where this language is used in wrongful dismissal cases in BC, but that has included the quantum of damages: In Avelin, that standard was applied to the question of whether certain sales would have been completed, for the purpose of assessing her commission entitlements. Justice Gomery had to apply a probability analysis to award her 'lost opportunity' damages in that regard - creating a rough figure that represents, in principle, a high percentage of the income she would have earned from the sales that likely would have been completed during the notice period, and a lower percentage of the income she would have earned from the sales less likely to be completed.

In other Provinces, the principle would be different (though the outcome might be similar), giving her 100% of the revenues she would have earned from those sales for which there's a >50% chance she would have completed, and nothing from the other sales.

Mitigation is typically assessed with the benefit of hindsight, yes, but the same difference in principle applies: The Court ought to determine whether the evidence shows, on a balance of probabilities, whether the employee would have successfully mitigated to a certain extent. If it doesn't, there's no reduction. If it does, then the employee gets a 100% reduction for what they would have successfully mitigated.

It can become a rather hard edge for employees if the employer satisfies that burden, but the contrary approach of arbitrarily assigning a probability-based reduction tends to have the effect of seriously relaxing what is supposed to be a high threshold for the employer.

While assessing 'past hypothetical events' on a reduced standard of 'real and substantial possibility' appears to be a uniquely British Columbian approach, the resulting practice of mitigation reductions in wrongful dismissal cases is pretty familiar across the country.

In Zoehring, in particular, however, the $140,000 reduction seems wild, given that there are no fewer than three variables that play into this reduction: When the new work would have been found; how much it would have paid; and the likelihood of the new work.

Given that the court is vaguely discussing a lower-paying role without any clarity on the scale, a 20% reduction seems quite aggressive, but given that there's no actual indication of how that figure was reached, it seems arbitrary bordering on random.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.