Bad Faith, Unfair Dealing and Conduct of Dismissal

Punitive Damages for Employers Business Man with fingers crossed

In employment relationships, an obvious imbalance of power exists, which could leave employees vulnerable to damage inflicted by the employer. This is a particular concern when an employee is terminated from a company. For this reason, the Supreme Court of Canada has stated that employers are obligated to act in good faith and fair dealing in the course and manner with which they carry out employee dismissals. An employer’s failure to fulfill this obligation may result in the employee being awarded damages for bad faith and unfair dealing.

What is a Terminating Employer’s Duty?

The seminal case establishing the obligation of good faith was Wallace v. United Grain Growers Limited [1997] 3 S.C.R. 701 (SCC). In its judgment, the Supreme Court of Canada defined good faith, by stating that the manner and course of employee dismissals must be:

  • candid and forthright;
  • honest, truthful and not misleading;
  • fair and reasonable; and,
  • sensitive.

Even in cases where the reason for the termination is valid, an employer could face litigation if the manner in which the termination is carried out breaches the principles of good faith and fair dealing.

What Constitutes Bad Faith?

In the case of Honda Canada Inc. v. Keays [2008] S.C.J. No. 40, the Supreme Court of Canada provided examples of dismissals conducted in bad faith. Some examples include terminations in which:

  • the employer makes declarations that result in an attack on the employee’s reputation at the time of the dismissal;
  • the employer misrepresents the employee’s reason for leaving;
  • the dismissal is meant to deprive the employee of a pension benefit or other right such as permanent status.

The employer’s conduct is important, not only at the time of the termination, but even after the employee has been terminated. Such conduct could also serve as a basis for awarding bad faith damages. In the case of Defaria v. XTRA Canada [2008] O.J. No. 377, the employer’s failure to provide the employee with a letter of reference was held to be bad faith conduct by the employer by interfering with the employee’s duty to mitigate.

How are Bad Faith Damages Determined?

Until recently, the penalty for breaching the good faith obligation was an increase in the length of the notice period the employer was required to provide to the dismissed employee. However, in 2008, the Supreme Court clarified how bad faith damages are determined in the case of Honda Canada Inc. v. Keays [2008] S.C.J. No. 40. Bad faith awards are now considered separately from an award of notice and are no longer calculated by adding onto the existing notice period.

The rationale underlying this determination is the fact that dismissals carried out in bad faith could cause psychological damage and mental distress with resulting losses to the employee. As such, instead of being simple extensions of the notice period, bad faith damages are fixed and are determined in the same way as for awards for other moral damages, namely by an employee’s ability to prove losses due to psychological damage and mental distress resulting from the manner of dismissal.

The Supreme Court of Canada in the Honda case further emphasized that awards for bad faith are compensatory rather than punitive in nature. That is, they serve to compensate an employee’s loss rather than act as a punishing deterrent for the employer’s bad conduct. The focus of bad faith damages is on the employee’s loss rather than on the employers’ misconduct. Again, this emphasizes the onus on the employee to provide sufficient proof of actual losses suffered as a result of the manner of the dismissal.

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