Wallace still hanging around

By Jeffrey R. Smith ([email protected])

Thanks to the Supreme Court of Canada’s ruling in Keays v. Honda Canada Inc. last year, there is a new standard for bad-faith damages in wrongful dismissal. Except when there’s not.

Last summer — June 27, 2008, to be precise — the employment law community was abuzz about the top court’s landmark decision in the closely followed Keays case, which had been working its way through the courts for years.

The Keays legal journey started in the Ontario Superior Court of Justice, which in 2005 ruled on the wrongful dismissal complaint of a Honda employee who had been fired after refusing a medical examination requested by his employer after multiple medical absences. It was notable at the time for the whopping $500,000 in damages awarded to the employee.

The case progressed through the Ontario Court of Appeal, which reduced the damages, and finally to the Supreme Court of Canada in 2008. By this time, there were several intervenors involved, as the case involved issues such as the admissability of medical notes and bad-faith damages. When the Supreme Court released its decision last summer, most employment law experts saw the ruling as a game changer that redefined how damages were awarded.

Bad-faith damages, known as Wallace damages, were effectively eliminated as a separate form of damages and were lumped in with aggravated or “moral” damages. In addition, the Supreme Court quashed the traditional procedure of awarding bad-faith damages as an extension of the reasonable notice period — often an arbitrary extension — and said they should correspond to actual losses by the employee from the conduct.

Those proclaiming a major change in the employment law landscape were proven right as subsequent court decisions followed the Supreme Court of Canada’s precedent and bad-faith damages in many wrongful dismissal cases were reconsidered according to the new standard. Many saw it as good news for employers as it gave a little more certainty, or at least consistency, in how damages might be awarded in these cases.

And then, almost exactly one year later, the Ontario Court of Appeal opened up the Wallace door again and may have thrown things back into uncertainty.

The court heard an appeal in the case of Slepenkova v. Ivanov, in which a real estate agent had been fired for refusing to sign a reworked contract. The day the agent was fired, the employer sent a text to other agents saying she was let go for “non-production” and refusing to sign a new contract. The trial court, which heard the case before the Supreme Court of Canada released its decision in Keays, felt the employer’s conduct amounted to bad faith and awarded Wallace damages of two months on top of the wrongful dismissal award of four months.

On the appeal this year, the Ontario Court of Appeal upheld the reasonable notice period. However, 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. 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.

So where does this leave employers and employment law practitioners in their expectations for wrongful dismissal suits where bad faith is alleged? Is Slepenkova an aberration associated with a transitional period after Keays or are lower courts likely to ignore the Supreme Court of Canada’s new standard if they feel strongly about an employer’s bad-faith conduct in a dismissal?

The uncertainty around bad-faith damages doesn’t seem to be going away quite yet.

For more information see:

Keays v. Honda Canada Inc., 2008 CarswellOnt 3743 (S.C.C.).

Slepenkova v. Ivanov, 2009 CarswellOnt 3749 (Ont. C.A.).

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