Manner of dismissal still in play
Question: If an employer provides a terminated employee with a severance package more generous than the common law entitlement, can it still be at risk of liability for bad-faith conduct in the manner of dismissal if the employee is unhappy with the way the termination was handled?
Answer: An employee’s entitlement to some combination of statutory termination and severance pay, common law reasonable notice, or pay in lieu thereof (collectively, “severance entitlement”), is often the central issue at the time an employee is dismissed without cause. However, an employer also has an obligation to conduct the dismissal in good faith and in a manner that is “candid, reasonable, honest and forthright with their employees.” A failure to act in good faith in the dismissal process may justify an award of bad-faith damages in excess of any severance entitlement.
For example, a bad faith dismissal could include the following scenarios:
• The employer makes declarations that result in an attack on the employee’s reputation at the time of the dismissal.
• The employer misrepresents the reason for termination.
• Dismissal with the intent to deprive the employee of a benefit, such as a pension.
Historically, the penalty for breaching the good-faith obligation was an increase in the length of the reasonable notice period. This payment was colloquially called the “Wallace bump” after the Supreme Court of Canada (SCC) decision Wallace v. United Grain Growers Ltd.
However, in 2008, the SCC clarified how bad-faith damages should be calculated and awarded in Keayes v. Honda Canada Inc. Following that decision, bad-faith damages, or moral damages as they are sometimes called, are now considered separately from an employee’s severance entitlement and are no longer calculated by extending the reasonable notice period.
The rationale underlying the Honda Canada decision is the fact that bad-faith dismissals could cause psychological damage and mental distress with loss to the employee. As such, instead of being simple extensions to the reasonable notice period, bad-faith damages are fixed and determined by an employee’s ability to prove losses due to psychological damage and mental distress resulting from the manner of dismissal.
Ultimately, upon dismissal without cause, an employer is obligated to provide the employee’s severance entitlement and must conduct the dismissal in good faith. Regardless of whether an employer provides a generous severance package in excess of what may be owing as a common law entitlement, if the dismissal is conducted in bad faith, then the employer may be separately liable for bad faith damages.
As a matter of best practice, when an employer provides a generous severance package, it should require employees to execute a full and final release in the employer’s favour for any severance in excess of the statutory termination and severance pay amounts. The release should include specific language releasing the employer from any claims for damages arising out of the employee’s employment and termination.
For more information see:
• Wallace v. United Grain Growers Ltd., 1997 CarswellMan 455 (S.C.C.).
• Keays v. Honda Canada Inc., 2007 CarswellOnt 1874 (S.C.C.).
