The <i>Wallace</i> factor

Landmark 1997 Supreme Court decision changed the wrongful dismissal landscape. Here’s how to avoid being ‘Wallaced’

For many people, work is one of the defining features of their lives. Identity and self-worth are closely tied to what people do for a living. Therefore, being fired from a job — particularly without cause — can be extremely stressful and damaging to an employee’s mental health.

Wallace v. United Grain Growers, a landmark decision by the Supreme Court of Canada in 1997, recognized this fact of the employment relationship and put in place a mechanism to punish employers that are overtly callous when terminating staff.

For HR practitioners and managers who have the power to terminate staff, it’s a must-know case. Almost every wrongful dismissal case before the courts today includes a claim for Wallace damages whether it’s warranted or not.

The high court sent a clear message to employers with this decision, and courts across the country have used its precedent to punish employers that dismiss staff in a cruel manner.

Top salesperson fired

In 1972, Public Press, a subsidiary of United Grain Growers in Manitoba, decided to go after a larger volume of commercial printing work. One of the key elements needed in order to do so was to hire someone with a proven track record in web-press sales.

Jack Wallace was working in sales for a competitor. He had been with that company, which had a web press, for 25 years. He was approached by Don Logan, marketing manager for Public Press, about jumping ship. Wallace expressed reservations about leaving secure employment.

He told Logan that, since he was 45, if he were to leave his current employer he would require a guarantee of job security. Wallace also sought assurances regarding fair treatment and remuneration. Logan told him not to worry, if he performed as expected he would have a job until he retired.

Wallace took the job and started in June 1972. He turned out to be a pretty good hire, as he was the top salesperson every year during his time at Public Press. But his tenure came to a halt on Aug. 22, 1986, when he was fired by sales manager Leonard Domerecki. No explanation was given, and only a few days earlier Domerecki and United Grain Growers’ general manager had praised Wallace for doing such a good job.

A week after the termination, an explanation was offered to Wallace in a letter. It said the main reason for the firing was his inability to perform his duties satisfactorily. Wallace launched a wrongful dismissal suit. In its statement of defence, United Grain Growers alleged Wallace was dismissed for cause, an allegation it maintained for more than two years. It only withdrew that defence when the trial started in December 1988.

The emotional toll on Wallace

Wallace was 59 when he was fired. He had been employed by Public Press for 14 years. The termination of his employment, and the subsequent allegation of cause, created emotional difficulties for him.

He sought psychiatric help and was unable to find another job. Word had spread throughout the printing industry that he had been fired for cause, and most people assumed he must have done something wrong to deserve that fate.

The Manitoba Court of Queen’s Bench awarded Wallace 24 months’ notice for wrongful dismissal and aggravated damages. That decision was appealed to the Manitoba Court of Appeal for various reasons by both Wallace and United Grain Growers.

The Manitoba Court of Appeal overturned the lower court’s decision. It awarded Wallace 15 months’ notice and threw out the award of aggravated damages. That decision was appealed to the Supreme Court of Canada by Wallace.

The Supreme Court dealt with a number of critical issues in the appeal. One thing Wallace claimed was that he had a fixed-term contract, guaranteeing him employment until retirement. Justice Frank Iacobucci, writing for the court, said there was insufficient evidence to support this claim.

Next up was the damages for mental distress. The Manitoba Court of Appeal had not allowed the damages, stating any award of damages beyond compensation for breach of contract for failure to give reasonable notice of termination, “must be founded on a separately actionable course of conduct.”

The fact Wallace suffered mental distress was not enough to warrant damages resulting from wrongful dismissal. He was merely entitled to reasonable notice. For there to be additional damages, the employer would need to do something beyond firing him that caused him mental distress. Therefore, the Supreme Court agreed with the Court of Appeal’s ruling and said no mental distress damages were warranted.

Wallace also sought damages for bad-faith discharge. He wanted the court to read into the employment contract a term that the employee could not be fired except for cause or legitimate business reasons. But Justice Iacobucci said the Supreme Court could not do so.

“The law has long recognized the mutual right of both employers and employees to terminate an employment contract at any time provided there are no express provisions to the contrary,” he said. “A requirement of ‘good faith’ reasons for dismissal would, in effect, contravene these principles and deprive employers of the ability to determine the composition of their workforce.”

Supreme Court opens the door on notice periods

But despite agreeing with the Court of Appeal that separate awards for mental distress damages and bad-faith discharge were not warranted, Justice Iacobucci opened the door to a further extension of the notice period in wrongful dismissal cases.

Just as factors like length of service, availability of similar employment and age of the employee play a role in determining the notice period, so too could the manner in which the dismissal was handled, he said.

Looking at past decisions that refused to grant such an extension of the notice period, Justice Iacobucci said they all failed to take into account that an employment contract is unique, with many characteristics that set it apart from a normal commercial contract.

Quoting from Contract Law and the Employment Relationship: The Proper Forum for Reform, he said that individual employees lack the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

Because employers hold the balance of power in the relationship, and because work is such a defining feature of many people’s lives, the court said employers ought to take care when terminating the relationship.

“The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection,” he said. “In recognition of this need, the law ought to encourage conduct that minimizes the damage and dislocation (both economic and personal) that result from dismissal.”

Justice Iacobucci said to ensure employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal. If that obligation is broken, then there should be consequences in the form of a lengthening of the notice period.

In Wallace, the Supreme Court said the lengthening of the notice period was warranted. The court noted the abrupt manner in which Wallace was terminated, despite having received compliments on his work from his superiors only days before.

It agreed with the trial judge that United Grain Growers had made a conscious decision to “play hardball” with Wallace and maintained unfounded allegations against him until the day the trial began. As a result of the unfounded allegations, word got out about the dismissal and it was rumoured in the industry that Wallace had been involved in some wrongdoing.

The trial judge concluded that the dismissal and subsequent events were largely responsible for causing Wallace’s depression, and therefore a notice period at the higher end of the scale was warranted. The Supreme Court agreed. It restored the trial court’s judgment of 24 months’ notice.

What merits Wallace damages

Defining exactly what constitutes good faith and fair dealing in the termination is difficult, Justice Frank Iacobucci of the Supreme Court of Canada said in the Wallace decision.

At a minimum, employers ought to be candid, reasonable, honest and forthright with employees and should refrain from engaging in conduct that is unfair or in bad faith, he said. To illustrate what might constitute a breach by the employer, he gave the following examples:

•In Trask v. Terra Nova Motors Ltd., the employer maintained a wrongful accusation of involvement in a theft and communicated this accusation to other potential employers of the dismissed employee.

•In Jivrag v. Calgary (City), there was a similar unfounded accusation of theft combined with a refusal to provide a letter of reference.

•In Dunning v. Royal Bank, the employee’s position was eliminated. But he was told by several senior executives that another position would probably be found for him and the new assignment would necessitate a transfer. At the same time this was happening, a senior representative was contemplating his termination. When a position could not be found, he was terminated. But this decision was not communicated to the employee for more than a month, despite the fact the employer knew he was in the process of selling his house in anticipation of the transfer. News of his termination was communicated to him abruptly following the sale of his home.
What Wallace isn’t

Wallace altered the wrongful dismissal landscape, allowing employees to receive additional notice if the employer acts in a callous manner during termination.

But there are some misconceptions about what Wallace damages really are. Wallace damages are not damages for mental distress. Being fired on its own will cause some mental distress in almost everyone. But that doesn’t mean that, simply because an employee suffers mental distress, he is automatically entitled to damages.

The employer has do something beyond merely breaching the terms of the employment contract. The penalty against employers for wrongful dismissal comes in the form of reasonable notice to employees.

Nor are Wallace damages designed to punish employers for bad-faith discharge. Requiring employers to have “good faith” reasons for dismissal would deprive employers the ability to determine the composition of their workforce.

“Such a law would, in my opinion, be overly intrusive and inconsistent with established principles of employment law,” Justice Frank Iacobucci of the Supreme Court said in Wallace.

So what, then, was the intention of Wallace? It was, quite simply, to give judges the ability to extend the reasonable notice period to compensate employees if the employer acted in a callous manner in the way it handled the termination.

In short, Wallace damages are not meant to punish an employer for how an employee reacts to a wrongful dismissal. Nor are they meant to award additional damages when an employer acts in bad faith in breaking a contract. Wallace damages are meant to punish employers that handle the termination itself in a callous manner.

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