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When should damages for bad faith in dismissal be awarded?


In the summer of 2008, the Supreme Court of Canada rendered its ground-breaking decision in the Honda Canada vs. Keays case. Among other things, the Supreme Court, on its own initiative, elected to revisit the nature of damages to be awarded in circumstances where the employer does not act in good faith in the course of dismissal.

Prior to that, the courts awarded what we have come to know as a “Wallace bump” in circumstances where bad faith had been found. However, the Supreme Court of Canada in the Keays case chose to replace this arbitrary approach with one based upon a compensatory analysis. As I and other commentators reported, the wording of the Supreme Court’s decision suggested that in the future, “The Damages Formerly Known As Wallace” would not be awarded as frequently as they had been, since a plaintiff would have to show not only that the employer had acted in bad faith, but that this bad faith had caused the employee to suffer some form of actual damages.

However, although I predicted that these awards would be made less frequently, I also suggested that in the right circumstances, employees may be able to prove more substantial damages, and therefore the awards could be significantly greater pursuant to the new regime.

Recently, I wrote a summary of the jurisprudence over the course of the first 15 months or so after the Keays decision was handed down. In my summary, I noted that although there was some inconsistency, most courts seemed to have followed the guidance of the Supreme Court and required that a plaintiff seeking The Damages Formerly Known As Wallace prove that they had suffered actual harm that was caused not by the dismissal itself, but by the bad faith exhibited by their employer. In many cases, claims for bad faith damages that would have succeeded under the old regime failed under the new analysis. This was, by and large, as I had predicted.

Most recently, however, the Alberta Court of Queen’s Bench released a decision in the case of Soost vs. Merrill Lynch Canada Inc. In that case, the court found that Merrill Lynch had acted in bad faith and adopted the compensatory approach set out by the Supreme Court in the Keays case. As a result, the plaintiff received $2.2 million in damages. Needless to say, this was far beyond any “Wallace bump” under the old regime. This seems to be an example of the type of case that I had suggested would result in far more substantial damages than the old approach.

From the time the Wallace decision was released in the late 1990s, plaintiffs’ counsel included claims for Wallace damages in the vast majority of wrongful dismissal claims. Effectively, they became part of the boilerplate Statement Of Claim. Perhaps unfortunately, many of our courts accommodated these requests by awarding bad faith damages in situations where the bad faith was marginal at best. As a result of these developments, many employers became scared to dismiss employees in almost any circumstances. They were cautioned to avoid dismissal on or near the employee’s birthday, before they left for vacation, after they returned from vacation, around the Christmas season (or other holidays), at the beginning of the week, at the end of the week, in the office where there are people who might overhear the discussion, by telephone, etc. The definition of “bad faith” seemed to grow to extremes that the Supreme Court is unlikely to ever have contemplated when it released its decision in Wallace. Subsequently, some courts, like the Ontario Court of Appeal, attempted to scale back the range of conduct that would be considered to do bad faith. Now, of course, the Supreme Court has adapted the approach to compensation for bad faith.

One of the issues that I, and other employment lawyers, have struggled with since the decision in Keays is whether that decision means that employees cannot receive damages as a result of the bad faith exhibited by their employer in the course of dismissal if that bad faith did not cause the employee to suffer damages that are quantifiable in some way.

If the employer’s bad faith conduct has caused the individual to suffer financial damages (as appears to be the case in the Merrill Lynch case), then it is certainly be compelling to argue that the individual should be compensated. However, what about conduct that simply causes the individual to suffer hurt feelings, beyond those that one would normally expect when someone loses their job? What if the employer carries out a dismissal in a less than perfect manner, such as doing it by telephone or email? Should that, in and of itself, result in additional damages?

What about situations where the employer misleads the employee about the reason for dismissal. They may say that the reason for dismissal was a reorganization, when the reality was that the individual was not performing well. In some cases, the employer has said that the position had been eliminated, but the individual subsequently learns that someone else has replaced them. The duty of good faith, as the Supreme Court has defined it, is said to include a duty to act honestly. Therefore, in this type of situation, the employer has breached its duty, although it may be argued that it did so for a good reason, wanting to spare the employee’s feelings at the time of dismissal.

The issue that I want to raise for discussion in this post is what types of conduct should lead to an award of damages for bad faith in the course of dismissal. Should a scenario like the one set out above result in an additional award to the plaintiff? What about the opposite scenario, where the dismissal was due to a reorganization but the employer told the employee it was due to his or her poor performance? Would it make a difference if the employer made such comments to others in the organization? Or to prospective employers?

Stuart Rudner
Miller Thomson LLP

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Stuart Rudner, Rudner Law

Employment Lawyer and Mediator at Rudner Law
Stuart Rudner is a leading HR Lawyer, mediator and a founding partner of Rudner Law, a firm specializing in Canadian Employment Law. At Rudner Law, their approach is simple. They want to understand your circumstances, your concerns, and your goals. They will then ensure that you understand the legal regime along with your rights and obligations. Once that is done, they work with you to design a cost-effective strategy that meets your needs. They want to be your trusted advisor.Read more
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