The damages formerly known as Wallace — 1 year later

Courts gradually adopting Supreme Court’s standard set in Keays but sometimes old ways die hard

Stuart Rudner

Wallace damages in the rear-view mirror?

The Supreme Court of Canada issued its decision in the landmark employment law case Keays v. Honda Canada on June 28, 2008. In the decision, the court essentially scrapped extension of the reasonable notice period as compensation for bad-faith conduct by the employer in the course of termination and said bad-faith damages should reflect any actual loss experienced by the terminated employee.

The extension of notice method of bad-faith damages had been in use since the Supreme Court’s verdict in Wallace v. United Grain Growers Ltd. in 1997, so many observers believed the new decision would significantly change how damages were awarded in wrongful dismissal cases and provide more certainty on the value of the damages.

Employment lawyer Stuart Rudner takes a look back at the past year in the wake of the Supreme Court’s revamping of bad-faith damages to see how much the landscape has actually changed.

A little more than one year ago, the Supreme Court of Canada rendered its decision in the landmark case of Keays v. Honda Canada Inc. Although the case was well publicized after the lower court decisions because of their award of punitive damages, many commentators believed the most significant aspect of the Supreme Court’s decision was the treatment of damages arising out of an employer’s bad faith in the course of dismissal.

Prior to Keays, damages for bad faith were typically known as “Wallace damages” or, since it was essentially an increase in the notice period, a “Wallace bump.” The Supreme Court appeared to fundamentally change the nature of such damages in Keays, adopting a compensatory approach that required proof of actual loss or damages. Recognizing the dramatic departure from the previous approach, many referred to these damages as “formerly Wallace damages.”

Courts initially slow to take new approach

Now that one year has passed since the final Keays decision, it is interesting to look back and see whether the change has been as significant as initially anticipated. Within the first few months after the Supreme Court’s decision, several lower courts issued decision that were, or should have been, impacted by the change in approach. However, some seemed to avoid the issue and, in some cases, continued to issue “Wallace bumps.”

As more time passed, more courts demonstrated an understanding that the legal framework had changed and that it would be more difficult to obtain damages for an employer’s bad faith in dismissal. Several decisions confirmed a higher standard and the need for supporting evidence before “the damages formerly known as Wallace” would be awarded. However, little analysis was undertaken regarding the type of evidence that would be required to support an award of such damages. Speculation was rampant with respect to a necessity for medical evidence and whether this would end up being treated in a manner analogous to personal injury claims.

In any event, it seemed to be clear there would be no more “Wallace bumps” of the notice period. Any compensation for an employer’s bad faith would require an assessment of damages and a distinct monetary award to compensate. In Fox v. Silver Sage Housing Corp. in the latter part of 2008, the Saskatchewan Court of Queen’s Bench found the employer had effectively engaged in a fake budgeting process in order to justify the dismissal of employee William Fox. Despite this evidence of bad faith, the court refused to award “the damages formerly known as Wallace,” as there was no evidence Fox had suffered any damages as a result of the bad faith conduct of the employer.

In the recent case of Smith v. Centra Windows Ltd., the British Columbia Supreme Court heard evidence of bad faith including baseless allegations of just cause for dismissal and company-wide dissemination of email messages relating to Sydney Smith’s dismissal. Furthermore, Smith claimed he had been forced to obtain counselling as a result of the depression which he suffered that was related to his loss of employment. However, the court found the evidence was not clear enough in showing the depression was caused by the manner of termination, as opposed to the mere loss of employment. This suggests a particularly high threshold for awarding bad-faith damages.

In another recent constructive dismissal case in British Columbia, Bru v. A.G.M. Enterprises Inc., an employee’s physician testified the employee suffered from depression as a result of his working conditions. The court found there had been a constructive dismissal and adopted a personal injury approach to assessing bad-faith damages. It divided the damages into what it called “pecuniary Wallace damages” of $5,000 and “non-pecuniary Wallace damages” of $12,000. Essentially, the court awarded pecuniary damages as a result of losses that were actually calculable and used the non-pecuniary damages for pain and suffering, which was not objectively calculable.

Wallace damages not extinct yet

These cases indicate the landscape has changed, as most commentators believed it had after Keays. They required evidence of damages or loss, and evidence such damages or loss were caused by the employer’s bad faith rather than the dismissal itself. In at least one of these cases, the assessment of damages was approached as it would be in a personal injury claim. But, as Canadian Employment Law Today editor Jeffrey R. Smith discussed in his Aug. 14, 2009, employment law blog, “Wallace still hanging around,” (view blog on www.hrreporter.com) the Ontario Court of Appeal upheld a reasonable notice period extension in Slepenkova v. Ivanov. The trial court had heard the case before the Keays decision was released and awarded a two-month extension on top of a wrongful dismissal award of four months after the employer fired a real estate agent for refusing to sign a reworked contract and then texted other agents that she was let go for “non-production.”

The Court of Appeal ruled the employer’s texts to other agents were not true and damaged the real estate agent’s reputation. It found these specific circumstances justified the Wallace damages awarded by the trial court.

“With the Keays decision having been out there for many months, one might have assumed the court would have restructured the bad-faith damages and applied the new requirement, basing them on actual loss by the fired employee,” said Smith in his blog.

“However, the court passed on applying the new standard set by the Supreme Court and upheld the Wallace damages, specifically saying the circumstances warranted the Wallace extension despite the standard set in Keays. Almost exactly one year (after Keays), the Ontario Court of Appeal opened up the Wallace door again and may have thrown things back into uncertainty.”

It remains to be seen whether Slepenkova is an anomaly or a signal of a shift backward. The former seems far more likely, as the Supreme Court’s decision in Keays was fairly clear in this regard, particularly its rejection of extensions of the notice period to compensate for employer bad faith. Despite the Ontario Court of Appeal’s approach in Slepenkova, it seems to remain that to obtain bad-faith damages, it will no longer be sufficient for an employee to simply show the employer engaged in some kind of bad faith and then ask for an arbitrary extension of the notice period. Instead, employees will also have to prove actual losses, such as personal injury, and show a causal relationship between the bad faith and the injury. The usual upset or distress that accompanies a loss of employment will not justify an award of “the damages formerly known as Wallace.”

For more information see:

Fox v. Silver Sage Housing Corp., 2008 CarswellSask 511 (Sask. Q.B.).
Smith v. Centra Windows Ltd., 2009 CarswellBC 1180 (B.C. S.C.).
Bru v. AGM Enterprises Inc., 2008 CarswellBC 2635 (B.C. S.C.).
Slepenkova v. Ivanov, 2009 CarswellOnt 3749 (Ont. C.A.).
Keays v. Honda Canada Inc., 2008 CarswellOnt 3743 (S.C.C.).

Stuart Rudner is a partner in Miller Thomson LLP’s Labour and Employment Group in Toronto. He can be reached at (416) 595-8672 or srudner@millerthomson.com.

FROMTHEARCHIVES

Several wrongful dismissal cases discussed in this article were covered in Canadian Employment Law Today after the decisions were released.

Fox v. Silver Sage Housing appeared as a You Make the Call selection in the April 8, 2009, issue.

The case summary of Smith v. Centra Windows appeared in the Sept. 23, 2009, issue.

Slepenkova and the Ontario Court of Appeal’s refusal to follow Keays was covered in the Aug. 26, 2009, issue.

And, of course, our report on the Keays decision appeared in the July 17, 2008, issue.

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