Canada: Quebec: Validity Of Severance Clause Despite Its Insufficient Character And No Duty To Mitigate Damages Where Duty Not Clearly Stated

A decision handed down on September 4, 2014 by the Quebec Superior Court¹ serves as a reminder to employers to provide for an employee's duty to mitigate damages in employment contracts containing clauses for termination of employment and a fixed severance entitlement.

The facts

An employee with 11 years' seniority was dismissed on August 15, 2012 following an economic and administrative restructuring. Under her employment contract, she was entitled to a fixed severance payment:

"(...) should it be determined that your services are no longer required after that time, and in the absence of just cause, it is mutually agreed that you shall accept 3 weeks base pay per year of service, to a maximum of 9 months, in full satisfaction of any and all claims you may have."²

At the time of termination, the employer offered to pay the employee the amount owed under the employment contract on the condition she sign a release. The employee refused to sign a release and so the employer initially paid her the minimum required under the Act respecting labour standards and withheld the balance.³

The employee felt the severance entitlement agreed to in the employment contract was insufficient (7.6 months) and filed a claim with the Quebec Superior Court for an indemnity in lieu of notice of 13 months' salary and other benefits, i.e. $226,553.75, less the severance paid under the employment contract, i.e. $95,192.30.

According to the evidence, the employee had found equivalent employment in January 2013.  

The decision

(a) Contractual severance payment where there is no duty to mitigate damages

The court first pointed out that, under Article 2092 of the Civil Code of Quebec and the case law interpreting that article, an employee may not renounce in advance, even by virtue of a consensual employment contract, his or her right to obtain an indemnity in lieu of reasonable notice of termination. Accordingly, an employment contract that provides, for example, for an indemnity of six months is not binding on the court, which can grant a larger indemnity if it determines that the indemnity specified in the contract is insufficient. The indemnity set out in the employment contract is therefore, in a certain way, a minimum indemnity, as it may be increased by the court.

Based on these principles, the Court therefore determined that the part of the severance clause stating that the severance payment was "in full satisfaction of any and all claims you may have" and the severance limit of nine months' salary were invalid.  This meant the court was not limited by the provisions of the employment contract and was required, instead, to ascertain if the indemnity specified in the contract was reasonable in light of the provisions of the Civil Code of Quebec or if the employee was entitled to a higher indemnity.

In this instance, under the terms of her employment contract, the employee was entitled to 7.6 months' salary, an amount that was owed effective on August 15, 2012, the date she was terminated.

Furthermore, because the employment contract made no reference to the employee's duty to mitigate her damages, the court found that the amounts earned by the employee subsequent to her termination were not required to be deducted from the contractual severance payment. Therefore, contractually, the employee was entitled to a minimum of $95,192.30 (7.6 months' salary), even though the evidence showed that she had found equivalent employment a little less than 5 months after her termination.

Nonetheless, in view of the protective public order nature of the provisions of the Civil Code of Quebec, which apply to all employees regardless of their hierarchical position, the court decided that it was necessary to establish, separately and without regard to the contractual severance payment, the indemnity in lieu of notice under the Civil code of Quebec that the employee would have been entitled to. The employee was entitled to claim the amount by which such legal indemnity in lieu of notice exceeded the contractual severance payment if that indemnity was higher than the contractual payment or, at her option and if the legal indemnity was lower, knowingly waive the legal indemnity and choose the contractual payment of $95,192.30.⁴

(b) Indemnity in lieu of reasonable notice

In the case at issue, based on the employee's age, i.e. 50 years old, middle management position, annual income and years of continuous service, the judge established that the legal indemnity in lieu of notice should have equaled 11 months' earnings. When the income she earned during that notice period was deducted, as it must be in computing the legal indemnity, the employee was entitled to receive $77,176.50.

It was therefore preferable for the employee to choose the severance payment of $95,192.30, an amount, again, she was entitled to because the severance clause did not state that the employee was required to mitigate her damages.

Conclusion

A word to the wise: employers should make sure to clearly specify the employee's duty to mitigate his or her damages in the employment contract and not merely include a clause liquidating the amount owed as an indemnity in lieu of reasonable notice. By doing so, they can limit opportunities for employees to choose, depending on whether they have mitigated their damages or not, whichever form of compensation is most advantageous for them, namely the severance entitlement under their employment contract or the indemnity owed under the public order provisions of the Civil Code of Quebec.  

Footnotes

1 Ellingsen c. PWC Management Services, l.p., 2014 QCCS 4199.

2 Ibid at para 44.

3 The employer paid the remainder of the amount due under the employment contract further to an application for payment into the court.

4 Ellington, supra note 1 at para 66.

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