Employment & Labour

Wrongful dismissal: recent case law increases legal uncertainty

By Doug MacLeod

Recently, it has become increasingly difficult for employment lawyers to assess an employer’s potential legal liability in connection with an employee termination. The law is pretty straightforward but predicting how a judge will apply the law to a specific termination is riddled with legal uncertainty.

A recent case involving a 54-year-old senior executive who earned about $275,000 a year who was terminated for just cause after 11 years service is a good case in point.

The issues

The judge in this case decided three main issues; namely: (i) did the company have just cause to terminate the senior executive’s employment; (ii) if not, how much notice of termination should he have received; and (iii) was the senior executive entitled to any punitive damages or aggravated damages because of the way the company treated him?

The law

When deciding whether an employer has just cause to terminate an employee and avoid paying termination pay, a trial judge is required to apply the test set out by the Supreme Court of Canada (the SCC) in a well-known 2001 case, as interpreted by the Ontario Court of Appeal in another well-known 2004 case.

If an employer cannot prove just cause, then the employee is entitled to receive reasonable notice of termination (or pay in lieu of this notice) unless the employee signed an employment contract with an enforceable termination clause. The test a judge applies to determine the appropriate reasonable notice period is set out in a 1960 court case.

Since the SCC clarified the law in 2008, trial judges have had jurisdiction to award employees punitive and aggravated damages.

The decision

1. Just cause: It is generally very difficult for an employer to prove just cause – especially for a long service employee with no prior discipline like the senior executive. Alleging just cause and then leading very little, if any, evidence at trial really annoys judges. I believe unsubstantiated allegations of just cause results in longer reasonable notice periods, aggravated damages in some cases, and a higher cost award against the employer.

2. Reasonable notice: Although the Ontario Court of Appeal has specifically directed trial judges not to apply the “one month notice per year of service” rule of thumb when determining the reasonable notice period, this rule of thumb has been a good place to start for employees like the senior executive until the last couple of years. In this case, after an 11-day trial, the judge concluded the company should have provided an 11-year employee with 19 months’ notice of termination or about 1.7 months per year of service.

3. Punitive damages and aggravated damages: When the SCC issued its 2008 decision on punitive damages and aggravated damages, most employment lawyers believed it closed the door on these types of damages except in extraordinary cases. Now, however, there is much uncertainty as to whether a particular set of facts will attract punitive and/or aggravated damages. In this case, the judge awarded the employee $100,000 in punitive damages for a number of reasons including the fact that the company intimidated the senior executive in the termination meeting, threatened to sue him for fraud and led no evidence at trial to substantiate the fraud allegations. The company was also ordered to pay $25,000 in moral damages because, among other things, the employer failed to be candid in the termination interview as far as the reasons for his termination were concerned, made unsubstantiated allegations of fraud, and knew the fraud allegations would be very stressful for the senior executive.

To my knowledge, this case has not been appealed.

Lessons to be learned:

1. Every employee should be required to sign an employment contract with a legally enforceable termination clause. In this case, the notice period could have been limited to eight weeks in a contract, decreasing legal uncertainty. The senior executive’s bonus accounted for about 41 per cent of his total annual compensation. The termination clause can also restrict (or eliminate) the amount of bonus an employee is entitled to receive during the notice period, decreasing uncertainty. This kind of clause could have saved the company hundreds of thousands of dollars.

2. An employer should not allege just cause unless it plans to lead credible evidence to substantiate the allegations. If just cause had not been alleged in this case, then the wrongful dismissal damages could probably have been decided by way of a summary judgment; not an 11-day trial. My guess is that if the parties cannot agree on legal costs, the company will be ordered to pay the senior executive at least $100,000 in legal costs – although the cost order could be much larger.

3. An employer should act in good faith when terminating a person’s employment. This should eliminate legal uncertainty and risk that a judge will order the employer to pay any punitive and/or aggravated damages, which totalled $125,000 in this case.

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