Employers must be honest, candid and forthright with employees. Failure to do can result in a judge ordering an employer to pay an employee aggravated damages. Reasonable people can disagree on whether an employer has acted in good faith. As a result, employee counsel often claims aggravated damages in addition to wrongful dismissal damages. At the moment, given the state of the law, it is difficult for employer counsel to assess a client’s potential legal exposure for aggravated damages. This blog summarizes the general law and two cases that applied it.
Aggravated damages in wrongful dismissal actions: The Supreme Court of Canada speaks
In 2015, the Supreme Court of Canada (S.C.C.) discussed an employer’s obligation to act in good faith towards an employee. In particular, “acting in good faith in relation to contractual dealings means being honest, reasonable, candid and forthright.”
An earlier S.C.C. decision stated that 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.”
Here are two 2019 cases where a judge ordered an employer to pay damages to an employee for failing to act in good faith.
Keddco MFG terminated Scott Ruston’s employment for just cause. The employer provided no details of the alleged cause at the time of termination. When he indicated that he would be hiring a lawyer, he was told that if he did, Keddco would counter-claim and that it would be very expensive. Mr. Rustin commenced a wrongful dismissal action and, sure enough, Keddco filed a counterclaim seeking damages for unjust enrichment, breach of fiduciary duty and fraud, as well as punitive damages.
The judge concluded the following conduct breached the duty to act in good faith: (i) the employer failed to be candid with the employee during the termination meeting in terms of the reasons for his termination for cause; (ii) the employer made personal attacks against the employee in its pleading and only dropped such allegations after trial after it was brought to its attention by the judge that no evidence was led to substantiate the allegations; (iii) the employer publicly made unfounded allegations of financial fraud as against the employee which the court concluded would follow him on his career path for the rest of his life.
Cost for breaching the duty of good faith: the Ontario Court of Appeal upheld the trial judge’s $25,000 damage award.
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 a Leave of Absence Agreement (LOA Agreement) which included the following condition:
“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 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.
Despite the language in the 2015 S.C.C case mentioned above to the contrary, the judge in this case seems to have imposed a duty on an employer to disclose a material fact to an employee that would affect his employment relationship: namely, the planned layoffs.
Cost for breaching the duty of good faith: 22 months pay and $20,000 in non-wrongful dismissal damages.
Judges are now regularly being asked to consider how an employer treats its employees during and after the employment relationship. Failing to act in “good faith” will result in the judge ordering the employer to pay additional damages. Employers’ counsels who are consulted before an employee termination should explain the obligation to act in good faith to their clients and what that obligation looks like in a termination situation.