On June 29, 2009, the Ontario Court of Appeal released its most recent pronouncement dealing with the issue of "Wallace damages".

In 1997, Justice Iacobucci of the Supreme Court of Canada wrote the majority decision in Wallace v United Growers Ltd., pursuant to which employers became subject to an obligation of good faith and fair dealing in the manner of employment dismissals. The court in Wallace held that damages resulting from the manner of dismissal would be available where the employer engages in conduct during the course of dismissal that is unfair, or is in bad faith by being, for example, untruthful, misleading or unduly insensitive. The court in Wallace held further that such damages would be awarded by adding to the length of the reasonable notice period. As a result, in cases over the last decade where employers have breached the obligation of good faith and fair dealing in the manner of dismissal, there has been a lengthening of the reasonable notice periods.

In the summer of 2008, the Supreme Court of Canada revisited this issue. Justice Bastarache's decision on behalf of the majority in Honda v. Keays severely curtailed the availability of Wallace damages. The court held that while normal distress and hurt feelings resulting from dismissal are not compensable, if the employee can show that the manner of dismissal caused mental distress that was in the contemplation of the parties, then additional damages can be awarded. The court stated that such damages would not be awarded through an arbitrary extension of the notice period, but rather through an award that reflects the actual damages. Justice Bastarache gave as examples of such conduct, the attacking of the employee's reputation "by declarations made at the time of dismissal, misrepresentation regarding the reason for the decision, or dismissal meant to deprive the employee of a pension benefit or other right, permanent status for instance".

In the wake of Honda v. Keays, it was thought that Wallace damages would not often be awarded, since employees would have to prove that the manner of dismissal, as distinct from the termination itself, caused actual mental distress.

In Slepenkova v. Ivanov, the Ontario Court of Appeal refused to set aside the Wallace damages awarded by the trial judge, notwithstanding the Supreme Court of Canada's decision in Honda v. Keays. While the court did set aside the Wallace damages award in favour of the plaintiff Nikolova, the award in favour of Slepenkova was sustained on the basis that the employer had sent a pager message to the employee's co-workers saying, "We are sorry to inform you that Ilona has been terminated from our team for non-production and refusal to accept the new contract terms - Vess". The trial judge found that the employer's communication to the employee's co-workers amounted to conduct that was unfair and in bad faith for two reasons: 1) the allegation that she failed to adequately perform her duties was unfounded and damaging to her reputation; and 2) the employer was attempting to use the termination of Slepenkova as a tool to ensure that the other employees would sign the amended agreement that Slepenkova had refused to sign. The trial judge awarded Wallace damages to Slepenkova equivalent to two additional months' notice ($10,000). The Court of Appeal found that the trial judge's finding of fact that the pager message was damaging to her reputation, was sufficient to sustain the Wallace award, even in light of the Supreme Court of Canada's decision in Honda v. Keays, which was rendered after the trial judge's decision in this case. The Court of Appeal in this case refused to intervene with respect to either the quantum or the approach to the Wallace damages.

It would appear that the final nails have yet to be hammered into the Wallace damages coffin.