Not too long ago the Supreme Court of Canada accepted that arbitrators have a broad discretion to refuse reinstatement of employees discharged without just cause and to award damages in lieu of reinstatement. In a recent decision, Arbitrator Sims adopted a new approach for determining what damages should be awarded in these cases.

Previous awards dealing with damages in lieu of reinstatement have, in a vague way, attached a greater value to employment under a collective agreement than employment at common law. They have awarded between three weeks and two months of salary per year of service. This approach to damages resembles the common law approach to employment terminations, which calls for an appropriate amount of notice. In addition to the months awarded based on years of service, arbitrators would sometimes also award a top-up percentage, to directly account for the loss of collective agreement benefits. This percentage top-up fluctuated between 15-25%.

In this new decision, Arbitrator Sims, after a very comprehensive analysis, adopted a new methodology. He determined that an employment relationship under a collective agreement is more similar to a fixed term employment framework, but it is subject to certain contingencies. Employment might not last until retirement because there could be, for example, a bankruptcy, a plant closing, resignation, a future termination for cause, technological changes, layoffs, or disability. He determined that damages are better assessed based on the likely amount the employee could have earned, with an attempt to capture all relevant contingencies in a discount factor. This is similar to how courts value future losses. In the particular case before him he applied the following analysis. He decided that the employee could have worked another 10 years until retirement but, because of various contingencies noted above, he discounted that 10 year potential by 75%. In other words he determined that the employee only had about a 25% chance of working that long for this employer. He then assessed his long term ability to mitigate damages at 75%. He calculated what the employee would have earned over 10 years and then reduced that sum by these contingencies. In the end he arrived at a figure of $40,000 for loss of the position, which coincidentally worked out to about 6 months of pay for this 6 ½ year employee. He ordered the employer to pay that amount with interest as damages in lieu of reinstatement.

There is a certain logic to this new approach so it may well be adopted by other arbitrators. Unfortunately, it creates a great deal of uncertainty about what damages will be awarded in these cases because there is so much discretion in evaluating potential contingencies. It also fundamentally changes the evidence you would call in the damages part of the case. If this approach is followed in future, it could also mean higher awards for damages in lieu of reinstatement.