End of Wallace damages isn’t all good news for employers

By Jeffrey R. Smith (jeffrey.r.smith@thomsonreuters.com)

In 1997, the Supreme Court of Canada introduced a concept that would become standard in wrongful dismissal cases where an employer acted in bad faith in the course of firing an employee. The concept involved extending a dismissed employee’s reasonable notice period — or usually compensation in lieu of — if the court found the employer treated the employee poorly when it fired her. This notice extension became known as Wallace damages and was a frequent element in wrongful dismissal cases for a decade.

However, the Supreme Court of Canada shifted gears in the summer of 2008 and altered the employment law landscape once again. In the landmark case Keays v. Honda Canada, it threw out the concept of extending an employee’s notice period and adopted a new way of compensating victims of bad-faith dismissal. In the new way of doing things, a fired employee would have to prove there was an actual loss from the employer’s bad-faith conduct and the court would award damages based on the value of that loss.

This new way of determining bad-faith damages was hailed by many as good news for employers because it eliminated what was often arbitrary notice extensions that had no pattern or predictability. With damages based on actual losses, the amount could be more certain. Also, some thought the instances of bad-faith damages being awarded might go down, since the onus was on the employee to prove actual loss.

Unfortunately for employers, the news was not all good.  Some saw the potential for even bigger damage awards if employees could prove huge losses. While the overall number of bad-faith awards have decreased since Keays, this fear seems to have been well-founded in light of a recent Alberta case.

In October, the Alberta Court of Queen’s Bench found an Alberta branch of investment firm Merrill Lynch acted in bad faith when it fired an investment advisor without cause. Under the Wallace way of doing things, the court would have likely added several months to the advisor’s award of 12 months’ pay in lieu of notice, equal to $600,000. However, the advisor was able to show Merrill Lynch’s actions significantly damaged his career and the court found his damages from bad-faith totaled $1.6 million, or almost three years’ pay on top of the one year already awarded.

Employment lawyer Stuart Rudner of Miller Thomson LLP in Toronto — who appeared before the Supreme Court on behalf of the Human Resources Professionals Association, an intervenor, in the Keays case — discusses the significance of this development in bad-faith damages on page 5 of the Jan. 11, 2010, issue of Canadian HR Reporter.

“On its face, (this case) appears to be a perfect example of what employment law commentators suggested could happen as a result of the Supreme Court’s decision in Keays,” says Rudner in his column. “This case appears to be one of those rare examples where not only can the employee prove he suffered actual damages as a result of the employer’s bad faith, but the amount of damages is far beyond what any employee would have received via a ‘Wallace bump’ under the old regime.”

What does this mean for employers who thought they had seen an end to the big bumps to wrongful dismissal awards for bad faith? Even though bad-faith damages are becoming less frequent, they could be bigger when they are awarded. If an employee can prove bad faith was severe and she suffered extraordinary losses, the employer might be worse off. Perhaps the often arbitrary extension of notice periods under the Wallace regime wasn’t so bad for employers after all.

Jeffrey R. Smith is the editor of Canadian Employment Law Today. For more information, visit www.employmentlawtoday.com.

What do you think of the Alberta court’s decision? Join the conversation by adding a comment.

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