Validity of termination settlement when just cause discovered later
Question: When can or can't after-acquired cause be used to reduce notice obligations?
Answer: An employer may dismiss an employee without just cause for any non-discriminatory reason, as long as it provides reasonable notice of the dismissal, or pay in lieu of notice. Sometimes a situation arises where an employer has dismissed an employee without cause, but then discovers after the dismissal that there was actually just cause to terminate the employment relationship.
The doctrine of “near cause,” which years ago was relied upon by employers to reduce notice obligations upon dismissal, is no longer accepted by Canadian courts. It's now “all or nothing:” the employer either has just cause and no obligation to give notice of dismissal, or it does not have cause and must honour its notice obligations. As such, if “after-acquired cause” is discovered after dismissal, it may be relied upon to entirely extinguish the requirement to provide notice or pay in lieu of notice, but it cannot be used to reduce notice obligations.
The British Columbia Court of Appeal's decision in Carr v. Fama Holdings is generally regarded as a leading authority on the concept of after-acquired cause. In Carr, the court confirmed that an employer can wrongfully dismiss an employee and yet have its actions saved if it later discovers conduct which took place during the term of employment which would have justified dismissal for cause.
An employer may add new grounds to justify dismissal for cause (meaning there is no requirement to give notice of dismissal) where those grounds existed at the time of dismissal but had not yet come to the employer's attention. However, if the employer was aware of the new grounds at the time of dismissal but did not rely on them, the employer will likely be considered to have condoned the employee's misconduct: see Lake Ontario Portland Cement Co. Ltd. v. Groner.
Finally, it is important to remember that the obligation of good faith in the manner of dismissal imposes a behavioural requirement on employers to investigate allegations of misconduct and give employees the opportunity to respond. The obligation also requires employers not to fabricate grounds for cause or maintain unfounded allegations of cause. As a result, where an employer legitimately discovers after an employee's termination that the employee engaged in misconduct sufficient to justify cause for dismissal, the employer can rely on that misconduct to extinguish its notice obligations. However, employers should be cautious not to manufacture illegitimate grounds for dismissal after the fact just to avoid a severance obligation as damages will likely flow from that type of “bad faith” conduct.
For more information see:
• Carr v. Fama Holdings Ltd., 1989 CarswellBC 187 (B.C.C.A.).
• Lake Ontario Portland Cement Co. v. Groner, 1961 CarswellOnt 70 (S.C.C.).
