Employment & Labour

Employer liability for moral and punitive damages

By Laura Williams

Because of the special nature of an employment relationship, employers have an obligation to act in good faith and to deal fairly with their employees. If an employer fails to act in good faith, courts may award damages against them for this failure. If the employer’s behaviour is particularly egregious, further damages may be awarded to punish the employer.

In this case, the Ontario Superior Court of Justice awarded $750,000 for moral and punitive damages to a senior managerial employee whose employment was terminated without cause after ten months of effectively being “benched.”

What are moral and punitive damages?

As stated above, employers have a duty of good faith and fair dealing in the employment relationship and the termination of the employment relationship. Moral damages are meant to compensate the employee’s loss as a result of the employer’s bad faith behaviour rather than punish the employer’s alleged misconduct. Therefore, the employee must demonstrate an actual injury or loss. This damage or loss must be a result of the manner of dismissal and not the mere fact of dismissal.

Unlike moral damages, punitive damages are not compensatory. They are meant to punish the defendant who has acted in a malicious, oppressive and high-handed manner in a way that represents a marked departure from ordinary standards of decent behaviour. The punitive damages award, when added to the compensatory award, must be rationally required to punish the defendant and meet the goals of retribution, deterrence and denunciation. Where the matter is an alleged breach of contract, the employer must have committed an independent actionable wrong, such as (but not limited to) a breach of the duty of good faith described above, to be ordered to pay punitive damages.

The case

The employee was hired by the company as a district manager-in-training in 2002. She was considered a rising star and was promoted up the corporate ranks to the role of vice-president, general merchandise. She consistently had excellent performance reviews and was told formally and informally that she was expected to eventually be promoted to chief merchandising officer. However, in Jan. 2010, the employee was informed that she would be removed from her vice-president role due to corporate restructuring and that, while she was still “valued by the company,” they “did not know what to do with her.” For 10 months after the meeting, the employee attempted to find another role within the group of companies. During this time, she learned that her most recent performance review had been changed from a promotion to a non-promotion rating. In Nov. 2010, the company gave the employee formal notice of termination.

The employee’s contract with the company indicated that the company would continue to pay her base salary for two years in the event of a without cause dismissal. However, 11 and a half months after her employment was terminated, the company unilaterally, and without explanation, discontinued payment.

The Ontario Superior Court of Justice found that the company’s conduct was “misleading at best, and dishonest at worst” because the company knew the employee’s career there was over long before the formal termination of employment. The decision to keep her in “suspended animation” was unduly insensitive and caused her mental distress. Similarly, the decision to stop payment of her base salary was unduly insensitive. The court further found that the company’s delay in answering undertakings until the eve of trial, and the torrent of production made during trial were capable of causing the employee anguish. As a result, the court awarded $200,000 in moral damages for pre-termination conduct and $50,000 for litigation conduct.

The court ordered a further $500,000 in punitive damages because, during the 10 months when the employee was trying to find an alternate role within the group of companies, the company would make representations to the employee about her career prospects that “detracted from, or even defeated that purpose” in a way that “was not just unduly insensitive, it was mean.”

What does this mean for employers?

The case provides a reminder to employers about the importance of maintaining good faith and fair dealing throughout the employment relationship, including with regards to the termination of employment. Despite the magnitude of the $750,000 award, employers should note that as a large company, it can be expected to face higher moral and punitive damages than a smaller company would for the same behaviour.

The company has a history of successfully lowering substantial extraordinary damage awards on appeal. In a 2014 decision of the Ontario Court of Appeal, the company successfully argued for a reduction of a $1,000,000 punitive damages award at trial to $100,000. Therefore, it remains to be seen whether the company will appeal this award, and what degree of success it may have.

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