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Employment & Labour

Unfounded allegations against dismissed employees can be costly

By Laura Williams

Dismissing an employee from their position can be one of the most challenging aspects of workplace management faced by employers. When an employer decides to dismiss an employee several organizational and legal risks can arise. Accordingly, it is important that terminations are conducted properly and in good faith to ease the transition for the employee and mitigate any risks to the employer. 

A recent Ontario case is an example of the liability employers could face when they engage in aggressive or questionable tactics with departing employees. The case demonstrates that employers who use such tactics could have damages awarded against them over and above the employee’s reasonable notice entitlement for bad faith in the manner of dismissal.

In the case, the employer dismissed an employee who had managed one of the company’s business divisions. He held the role of president of the division, but his role was largely that of a salesperson. As a result, he delegated many of the business administration functions to subordinates he felt were more qualified to do that work. His division had not performed well for several years, but he and his subordinates continued to receive full bonuses for the years of downturn. This was identified as an issue by one of the principals of the company and an issue also arose when the employee spoke out in a negative way at a meeting of the company’s managers.

The principal subsequently elected to dismiss the employee for cause alleging that he had defrauded the company by inflating sales statistics in order to secure a full bonus in years where his division had not performed well. When the employee asked for details of the allegations the employer simply told him “I think you know” and failed to provide further details. The employer further alleged that the employee had disbursed company funds for his own personal benefit, thus enriching himself unjustly, and tied his division’s poor performance to his own poor performance as its manager.

The employee approached the principal about his dismissal and indicated he would retain a lawyer. The employer responded that should he make a claim for wrongful dismissal the employer would counterclaim for damages arising out of his alleged fraud and unjust enrichment. If the employee did not make such a claim, the principal indicated she would forgo the counterclaim as well. The employer warned the employee that litigation would be expensive for him.

Nevertheless, the employee commenced an action for wrongful dismissal against the employer. In its statement of defence, the employer maintained that the employee was dismissed for just cause and filed a $1,700,000 counterclaim against him for unjust enrichment, breach of fiduciary duty, and civil fraud.

At trial, the court held that the employer had failed to establish just cause for the employee’s dismissal and awarded him 19 months’ salary in lieu of reasonable notice, and also found that the counterclaims against him were completely without merit. As a result, the court also awarded the employee $25,000 in aggravated damages for the manner in which he was dismissed because:

  • the employer was not candid with the employee about why he was being terminated for cause;
  • the employer publicly made unfounded allegations of financial fraud against the employee;
  • the employer personally attacked the employee in its pleadings and only dropped these allegations once the court pointed out that there was no evidence to substantiate them; and
  • the employee termination and the $1,700,000 counterclaim strongly affected him, such that he described the experience as “devastating,” and the employer acknowledged that this result was anticipated.

The court also awarded $100,000 in punitive damages against the employer because:

  • at the time of the dismissal the employer threatened to counterclaim against the employee if he brought a claim of wrongful dismissal and proceeded to do so for an amount which was excessive even if the allegations in the counterclaim had merit and it became apparent the employer made the counterclaim simply as a means to intimidate the employee into dropping his claim;
  • the employer attempted to intimidate the employee at the meeting by cautioning him about how expensive litigation could be, and the litigation was rendered more expensive by the employer unreasonably prolonging the trial;
  • the employer did not advise the employee of the particular allegations against him until filing the counterclaim against him; and
  • it became apparent that the employer had no intention of proving the $1,700,000 of damages sought in the counterclaim, this amount was merely to intimidate the employee.

Implications

The case reaffirms that employers need to be cautious about the manner in which they dismiss employees, particularly employees with a long tenure. While it may be tempting to assert cause when dismissing an employee, employers should only do so where the employer has evidence supporting its position. Accordingly, employers should meticulously review evidence of employee misconduct and conduct investigations in an appropriate manner before taking a position of just cause. Attempts to characterize incidents which would not normally amount to cause as just cause, making false allegations to justify a termination, and threatening to commence costly litigation against an employee can result in serious cost consequences for employers.

The case also demonstrates that employers must be cautious about post-termination conduct as well. Even after the employee has left the service of the employer, the means by which the employer interacts with the employee after termination will be a relevant consideration in a claim for wrongful dismissal. Where employers act callously towards employees post-dismissal, it will still be treated by the courts as conduct related to the termination and may result in an increased damage award.

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