It is clear that commencing an independent business has been considered acceptable mitigation on a macro level. The issue, however, is more complex than it may appear at first blush. The case law is conflicted as to whether self-employment should be conditioned by a preliminary search for alternate employment.
Unreasonable – No Prior Job Search
Huszar v Antech is a November 1988 decision of O’Leary J. of the Ontario Supreme Court [1988] O.J. 2145, not otherwise reported, in which the trial judge found that the plaintiff’s decision to open his own business was imprudent.
The plaintiff, following termination, contacted only one potential employer and did not reach out to any of his contacts in his industry. He did contact two job placement agencies but made no real effort to pursue opportunities through them. The decision found a failure to mitigate by deciding to become self-employed. (this passage is from McIsaac discussed below, see also Dash v Hudson Bay)
I conclude his failure to look for employment was the result of a career decision he made soon after October 22, 1984 that he would go into business for himself. No one can complain about a man making that decision, and it may have been the right one for him to make. But the defendant is not responsible for the earnings lost in the three years after August 15, 1984, unless going into business for himself had a reasonable likelihood of keeping his loss as small as it would have been if he had sought employment.
I am satisfied as well that he had no reasonable prospect of making as much income during the first three years in his own business as he would have if he had continued to work for others.
And again: (from Wenarchuk v. Comstock Canada below)
. . . has not established that opening up his own business was a reasonable way to mitigate his damages, for he has not shown that there was any prospect, let alone a reasonable prospect, that by so doing he could make as much income in the three years following . . . as he could by working for others.
This case raises the question of “to whom is the obligation owed ?”, which in essence becomes a fundamental principle of the mitigation obligation. As noted above in Forshaw and below, two court of appeal decisions have decided that such is not an obligation owed to the employer.
Need to Test the Market
This February 2008 decision of the British Columbia Supreme Court also was of the same view that the choice to commence an independent business should be first qualified by evidence that there no comparable jobs were available after a diligent job search.
Business Review Needed after 4 to 5 Months
The Queen’s Bench of Saskatchewan considered this issue in Wenarchuk v Comstock Canada, an October 1997 decision of Scheibel, J.
The plaintiff was employed from February 1971 to December 1997 as an electrical foreman, after which he was promoted to electrical field superintendent, a position which he held from 1997 to termination in January of 1993, which was due to an economic downturn.
A few weeks following termination, he opened his own electrical business, purchased a van and equipment. He asserted that the termination caused him severe depression, which eventually required professional therapy. His business failed after 10 to 11 months and he suffered a loss of $6,500. He then applied for several alternative positions without success.
The court concluded that although the decision to open the business was reasonable and made in good faith, and rejected the Huzsar reasoning because of factual differences. However, the court continued to hold that after four to five months, he should have been aware that the business would not succeed. In addition, the court was influenced, apparently, by the fact his job search was limited to Regina. The court concluded that he could have been employed by the end of December 1993 and reduced the notice period set at fourteen months by three months.
Reasonableness Test
The theme of a reasonableness test in becoming self-employed was again raised and considered in Hannigan v Ikon Office Solutions, a decision of the British Columbia Supreme Court in June of 1998. The plaintiff had elected to commence his own agency by which he became a Xerox dealer in late February of 1997, after his termination in early December of 1996. It was shown that the plaintiff had been active in a job search and that the suggestion of the independent agency was that of Xerox to him. This was factually seen as a reasonable course of conduct.
Last Resort
Allan v Westinghouse is a 2000 obiter decision of Whitten, J. of the Ontario Superior Court (unreported) which concluded that self-employment should be considered the last resort as opposed to the first, in view of the need to incur start up costs that may delay the receipt of positive cash flow and also “because the self-employed plaintiff may make personal choices that are incompatible with reasonable efforts to mitigate”. (the latter passage being a quotation from the McIsaac case referenced below) In Allan, the trial judge found no breach of the mitigation obligation, notwithstanding this admonition, in view of the evidence from the relocation counselor advocating such a step and that there was no evidence of alternate employment possibilities. 1
Failure to Test the Employment Market Fatal
The Supreme Court of British Columbia in the December 2009 decision of Pearlman, J. in McIsaac v Healthy Body Services had before it a similar plea that the plaintiff, by commencing his own business and not seeking alternate employment with a competitor selling nutrition products had violated his obligation to mitigate. The new business venture was allegedly spectacularly unsuccessful, as alleged by the plaintiff, losing $1.6 million between 2003 and September 30, 2007. 2
The trial judge found that the plaintiff’s evidence that he did not seek employment with competitors because his prior aggressive sales pattern had made him an unattractive commodity to be unacceptable. The plaintiff, the court determined, should have tested that market. The defence witness had testified that good sales people were hard to find and that he had experienced difficulty replacing the plaintiff.
The trial judge made the critical finding that had the plaintiff taken steps to find comparable employment, he likely would have succeeded.
While the court agreed that the plaintiff was free to commence his own business, he concluded such steps must be reasonable. The trial judge in McIsaac found comfort in Allan referenced above.
Constructive Dismissal – Own Business OK - Obiter
As mentioned above, the British Columbia Supreme Court in Zalusky v Nestle, a December 1992 case, had decided that the employee’s decision to open his new business, where no alternate employment was available, absolved him of any need to consider the employer’s alternate offer of employment in a constructive dismissal case. The words are clearly obiter as the court found that there was no constructive dismissal and also there were alternative job opportunities available:
if it was clear no suitable employment existed and if the only way that an employee would be able to obtain an equivalent occupation would be to start his or her own company, I do not think that the employee should be forced to mitigate his or her damages by continuing with the employer. If there is no prospect that the employee will be able to find alternate employment, there is no point in delaying the employee in establishing his or her new business which will take some time to grow before it will represent an equivalent occupation.
OCA Approves Own Business
The Ontario Court of Appeal confirmed that a person may start his own business to mitigate damages as stated in Gyrba v Moneta Porcupine Mines in December of 2000. 3
In Gryba, the plaintiff, following his dismissal in June of 1995, considered the possibility of starting a junior mining company as a result of which he staked 42 claims. When he did find new employment in April of 1996, his new employer requested that these claims be assigned to it to avoid any conflict issues in exchange for which the plaintiff received 400,000 shares, the value of which at trial was determined to be $144,000.
The trial court, as confirmed by the Court of Appeal 4 required the employer to show that during the notice period of 9 months that these claims had then attained a monetary value and that would have been reasonable for the plaintiff to dispose of these claims in that period. That was not the evidence and accordingly there was no offset for the value of these assigned claims.
A further Ontario Court of Appeal decision was released in April of 2001, which curiously, as with Gryba, was not referenced in any of the decisions on this topic released after this date as cited above. Given that it upheld the trial decision on the same issue, made in June of 2000, the above case law, at least in Ontario, should be reviewed with this qualifier in mind.
The plaintiff, a mechanical engineer, was employed from April of 1996 to January 1997, at which time he held employment as a Technical Consultant in the international fossil fuel power generation group in Cambridge, Ontario.
The plaintiff refused an offer of alternate employment with the same employer at another division of the defendant in Ohio, which the court saw as a reasonable decision.
On termination, the plaintiff elected to commence his own business as a consultant. The court concluded that “the fact that the early years of the respondent’s self-employment did not live up to his expectations does not mean that this was an unreasonable attempt at mitigation”.
More importantly, the appellate court decision, written by Finlayson. J.A., stated that the employee has a right to focus on his long term career aspirations and need not focus simply on the immediate short term results to pacify the plea of the employer on the need to show immediate mitigated results. This is a remarkable statement and in effect, casts aspersions on the prior case law which demands those seeking self-employment must do as a last resort, having first proven a failed mitigation search:
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. The respondent’s efforts at mitigation cannot be classified as unreasonable simply because his actions did not neglect all other interests while focussing exclusively on his short-term obligation to mitigate damages for the sake of his former employer.
A fair inference from the above passage was that the plaintiff had reasonable expectations that his business endeavor was to be successful as the court noted that the financial results did not live up to his anticipated results. The precise details of such expectations are not evident from the decision.
It is to be noted, however, that the court gave the green light to the employee to consider his own long term interests and need not focus purely on the employer’s short term damage liability. This would preclude the need for a preliminary unsuccessful job search.
Qualifier by OCA
The Court of Appeal considered this issue again in Ceccol v Ontario Gymnastic Federation, a decision released in September of 2001, five months later.
Shortly after her termination, the plaintiff became an independent distributor of a Japanese company selling preventive health care products. For this right, she paid $4,500 and made no profit for the first 16 months. She made no attempts to seek employment in the sports administration field where she had spent her entire career. The Court of Appeal also noted that the Executive Director, who was terminated the same day as the plaintiff, found employment in four months.
The trial judge had found that she might have found employment in her area of expertise, based on the plaintiff’s evidence in cross-examination, as the employer led no such affirmative evidence. He also concluded that the plaintiff had no reasonable prospect of earning any income in the shorter run in her new business endeavour. The plaintiff had further testified that she feared returning to active employment because of the trauma of dismissal.
The Court ducked the principled issue by stating that each case must be decided on its particular facts. The mitigation finding and the discount from 16 months to 12 ordered at trial were both upheld on appeal.
The Test of Competing Interests
The decision of the Ontario Court of Appeal in Peet v Babcock is quite similar in its approach to that expressed by the British Columbia Court of Appeal many years earlier in August of 1989 in Forshaw v Aluminex Extrusions. This case was discussed earlier on the issue of general principles but it does bear repeating on this subject.
The plaintiff had summarily rejected an early offer of a job offering a lesser salary of $40,000 plus an undefined commission, contrasted with his prior income of $68,000. He did so without entering into any discussion as to what commission he was to receive from the prospective employer. The plaintiff thought the new business unlikely to succeed. As the business was a start-up, there was expected to a period before any sales were made.
The court upheld the trial judge’s finding of fair mitigation and in so doing, described the duty to mitigate as one which is to consider the plaintiff’s own ambitions and interests and not those of the defaulting party, as did the Ontario Court of Appeal years later:
That "duty"—to take reasonable steps to obtain equivalent employment elsewhere and to accept such employment if available—is not an obligation owed by the dismissed employee to the former employer to act in the employer's interests. It would indeed be strange that such a duty would arise where an employer has breached his contractual obligation to his employee, having in mind that no duty to seek other employment lies on an employee who receives proper notice.
The duty to "act reasonably", in seeking and accepting alternate employment, cannot be a duty to take such steps as will reduce the claim against the defaulting former employer, but must be a duty to take such steps as a reasonable person in the dismissed employee's position would take in his own interests—to maintain his income and his position in his industry, trade or profession. The question whether or not the employee has acted reasonably must be judged in relation to his own position, and not in relation to that of the employer who has wrongfully dismissed him. The former employer cannot have any right to expect that the former employee will accept lower-paying alternate employment with doubtful prospects, and then sue for the difference between what he makes in that work and what he would have made had he received the notice to which he was entitled.
Self Employment in the face of two offers
The B.C. Supreme Court found that the plaintiff's decision to reject two offers of comparable employment and to pursue his own business endeavour was a violation of his duty to mitigate. 5 The decision to obtain his real estate licence, a field in which he had no background, had been made prior to these offers being extended.
In 2009, the Alberta Queen’s Bench in Johnson v Top-Co had before it the Peet decision when it considered the plea of failure to mitigate. As noted above, the plaintiff disregarded two potential offers of employment in the apparent intent of becoming self-employed as a cattle farmer by increasing his acreage and herds. The court agreed self-employment was acceptable mitigation but continued nonetheless to find that the decision to disregard the overtures of two possible employers and remove himself from the wage economy in favour to his self-employment was a failure to mitigate, reducing the claim of 20 months to 14.
It is incongruous to acknowledge that self-employment was acceptable and then penalize the plaintiff for the same conduct. These cases were each decided after Forshaw and Peet. They lead to the conclusion that commencing a new business in the face of comparable offers would not meet the test of fair mitigation.
Industry in Decline
This issue was again considered in Day v JB Excavators, a decision of the Ontario Superior Court in November of 2011. The plaintiff showed no tangible records of a job search following his termination in November of 2001 after thirty years of employment. In the spring of 2002, he acquired a property, on which he planted and harvested trees. He had made one formal job application which was the only letter in evidence showing a job search. His farm business entered no revenue in 2002 or 2003. He was also paid $6,725 for relocation counseling and made no use of this service. There was, however, no evidence introduced of the second branch, and the judge was satisfied that the industry was facing economic difficulties as was the defendant itself, which led to the plaintiff’s termination.
The court reviewed the two decisions of Ceccol and Peet and concluded that it was permissible for the plaintiff to become self-employed. No mitigation offset was given. 6
No Law Compels One Career
This is a much earlier decision of October 1981 from the Supreme Court of British Columbia. The plaintiff had been terminated from his position as a line supervisor on June 15, 1980, after which he made a “few enquiries concerning positions in the electrical business but finally decided to go back to real estate”. He achieved his real estate licence through a home correspondence course in July of 1981.
The plaintiff’s work history was relevant to the analysis. He had left British Columbia Hydro in 1974 and then went into business for himself which was not successful. He then decided to sell real estate at which time the defendant had contacted him and offered this position which commenced in the spring of 1978. Soon after this event, he suffered a heart attack which required a 9 week absence.
The trial judge concluded that a fair analysis was that “he was no longer suited for work as a line supervisor”, in that “he left one job, went broke in another and was fired from a third”. The judge also stated that “no law compels a person to pursue only one life-time career”.
On these facts, the court found that he acted reasonably; however, Bouck J. determined that a fair value should be seen in his acquisition of a capital asset, namely, a real estate licence and deducted the sum of $3,500 from the damage award to reflect this for the notional period from July 15 1980 to November 15 1980, the notice period being set at 5 months.
Move to Hawaii
In a B.C. Supreme Court decision, 7 the plaintiff elected to move to Hawaii to commence a new business selling tropical fruit vinegars. She did so roughly four months after termination, well within the ten month common law notice period. By the date of trial, the business had yet to show a profit. This was determined to be acceptable mitigation, in view of the lack of evidence that had she remained in B.C,. alternative income was likely. The Court noted:
As suggested by Ryan, J. (as she then was) in Ward v. Royal Trust Company of Canada (22 March 1993), Vancouver C926477 (B.C.S.C.), at some point it becomes reasonable for a person who has lost her job and made extensive efforts to find another, to decide to start rebuilding her future by going into business for herself, even though a profit or other return in the short-term may be unlikely. (See also the cases cited at Note 1, § 10.52 of E.E. Mole, The Wrongful Dismissal Manual, vol. 2, (Toronto: Butterworths, 1990).
Conclusion
There is not a distinct pattern in the decided cases on this subject, although there are two strongly worded decisions of the Ontario and British Columbia Courts of Appeal. The ramifications of an adverse finding are significant. It may yet be wise to conduct a job search as a conservatively protective measure.