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Failure to disclose planned layoff costs employer 22 months pay and 20K punitive damages

The facts

planned layoff

Mr. Jonasson, a 55 year old engineer with 22 years’ service with Nexen Energy was thinking about either retiring or taking a leave of absence. He decided to request a six month leave of absence. The employer agreed to his leave request if he entered into the following agreement:

I agree that the Company is under no obligation to return me to my original position or one of equivalent level upon my return to active duty. If a suitable role is offered and I decline, or if a suitable role is not found, I understand and agree that I will be considered to have resigned as of the date my leave was scheduled to have ended.

The Company knew that it would be laying off employees at Mr. Jonasson’s level during the requested leave of absence but did not tell him.

During his leave, the Company implemented the planned layoffs and claimed that since there was not a suitable position available for him at his level in the organization that Mr. Jonasson had resigned at the end of his six month leave pursuant to the agreement set out above.

The issue

Did the Company have a duty to tell Mr. Jonasson about the layoffs that were expected to take place during his leave before he decided to proceed with the leave request?

The decision

In a 2014 case the Supreme Court of Canada (the “S.C.C.”) recognized that acting in good faith is an “organizing principle” underlying all contract law. Under this duty of good faith, parties must not lie or knowingly mislead each other about matters directly related to the performance of the contract: “… “active dishonesty constitutes bad faith, but failure to disclose a material fact does not.”

In a later case that applied the duty of good faith in an employment case, the S.C.C. wrote that “acting in good faith in relation to contractual dealings means being honest, reasonable, candid and forthright

In Mr. Jonasson’s case the judge concluded that Nexen failed to act with candour and forthrightness by allowing Mr. Jonasson to enter into a LOA Agreement at a time when it knew that a significant percentage of management positions would be cut. “As a result, Nexen’s deliberate and ongoing secrecy about the intended cuts prevented Mr. Jonasson from protecting his own interests” and therefore breached its duty to act in good faith towards Mr. Jonasson.

Damages for breaching the duty of good faith

The judge refused to uphold the deemed resignation clause in the LOA and concluded the Company should have provided Mr. Jonasson with 22 months notice of termination.

Punitive damages

In addition, Nexen was ordered to pay Mr. Jonasson $ 20 000 in punitive damages. In coming to this conclusion, the judge held that an employer’s breach of its duty of good faith can result in punitive damages.

By keeping Mr. Jonasson in the dark on the planned layoffs, the judge concluded the Company

… exploited the LOA Agreement’s deemed resignation clause. Though not malicious or vindictive, this degree of high-handed bad faith offends this Court’s senses of reason and decency.”

Lessons to be learned

  1. Although the case that created the duty of good faith stated that “active dishonesty constitutes bad faith, but failure to disclose a material fact does not,” the judge in this case did effectively conclude that the Company was obliged to disclose a material fact to Mr. Jonasson; namely, the planned layoffs.
  2. This case has troubling implications. What if an employee asks human resources for a leave and human resources does not know about planned layoffs? Is human resources deemed to know about the layoffs because someone else in the organization has knowledge? If not, does this mean that senior management should keep this information from human resources to avoid this kind of result? At what point in the decision making process does the duty to disclose arise?
  3. Does lying/misleading by omission constitute the kind of behaviour that should attract punitive damages which “are restricted to advertent wrongful acts that are so malicious and outrageous that they are deserving of punishment on their own.” I think this case significantly expands the scope of punitive damages and will result in more claims for punitive damages by employees unless this case is reversed on appeal.

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Doug MacLeod, MacLeod Law Firm

Employment and labour lawyer at MacLeod Law Firm
For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising and representing employers in connection with employee terminations. If you have any questions, you can contact him at 416 317-9894 or at doug@macleodlawfirm.ca. Read more
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