We are pleased to tell you about two very significant decisions of national importance that were issued in the spring/summer of 2008 and which finally bring some good news for employers in the area of wrongful dismissal.


In 1997, the Supreme Court of Canada (SCC) introduced the concept of “bad faith discharge” in Wallace v. United Grain Growers Ltd. In doing so, the SCC held that employers have a positive duty to treat an employee with good faith and fair dealing when terminating employment.

The SCC held that a breach of the employer’s obligation of “good faith and fair dealing” should be compensated for by adding to the length of the notice period. For example, a terminated employee may have been entitled to a six-month notice period, but is awarded nine months due to the employer’s bad faith. This increase in the notice period has come to be known as “Wallace damages.”

Revisiting Wallace Damages

On June 27, 2008, the SCC issued its decision in Honda Canada Inc. v. Keays.1 This decision radically changes the nature of “Wallace damages.” Employees may still be entitled to damages resulting from the manner of dismissal, but such damages will no longer be awarded by way of an “arbitrary extension of the notice period.” Instead, the employee will have to prove that he or she has, in fact, suffered actual compensable damages, which will be assessed accordingly.

In Wallace, the SCC specifically noted that bad faith discharges would not occur in every termination. It made the point that termination of employment is usually an unhappy event and that only the most extreme conduct would justify a finding of bad faith.

Unfortunately, following the decision in Wallace, it became commonplace for terminated employees to automatically claim “Wallace damages,” whether sufficient facts existed to justify the claim or not. This introduced an additional complexity into wrongful dismissal lawsuits and reduced the likelihood of a quick resolution.

It is hoped that with the decision in Keays, and the requirement that an employee must now prove he or she has suffered actual compensable damages, fewer claims for damages resulting from the manner of dismissal will be made.

A Mistake is Not Bad Faith

Two common grounds for claiming Wallace damages are (i) where an employer terminates an employee during or on return from sickness or disability leave, and (ii) where an employer makes unfounded allegations of cause or other misconduct. Mulvihill v. City of Ottawa addresses both of these grounds and makes it clear that these circumstances will not always result in an order for bad faith damages.

Mulvihill had been employed by the City of Ottawa for three years, and previously by the neighbouring City of Kanata for about four years. The employer had significant concerns about Mulvihill’s work performance and behaviour around the workplace. The City decided to terminate her employment due to insubordination and a failure to return to work from a sick leave. Mulvihill then sued for wrongful dismissal.

The City originally defended the lawsuit on the basis that there was “just cause” for the termination. The City subsequently abandoned the allegation of just cause prior to trial and provided Mulvihill with pay in lieu of notice of termination equal to three months’ salary and benefits.

The trial judge determined that the written contract entitled Mulvihill to severance in an amount equal to 4.5 months of salary and benefits.

The trial judge also ordered the City to pay Wallace damages in the amount of 5.5 months’ pay. The trial judge based his decision on the fact that Mulvihill was on sick leave when terminated and because the employer had initially terminated her employment on the basis that it had just cause.

The Ontario Court of Appeal unanimously held that Wallace damages should not have been awarded. The court noted that the City may have been mistaken, but that it had a reasonably held belief at the time of termination that there was sufficient cause to terminate the employment relationship. The court said:

So long as an employer has a reasonable basis on which to believe it can dismiss an employee for cause, the employer has the right to take that position without fear that failure to succeed on the point will automatically expose it to a finding of bad faith.

The court also noted that termination of an employee on sick leave was not automatically prohibited — there must be other evidence of bad faith to justify bad faith damages. Terminating a sick employee may be a mistake, but it is not automatically unfair or bad faith.

This decision is significant because it refutes the tendency of courts to automatically award bad faith damages, whether there is sufficient evidence to justify making such an award or not.

Lessons for Employers

Both of these cases are good news for employers — an ex-employee’s allegation that he or she has been terminated with bad faith is likely more difficult to prove than ever before. It is hoped that this will result in fewer claims for bad faith damages. However, it must be remembered that employers still have an obligation of good faith and fair dealing in the manner of dismissal. Here are some tips to avoid breaching this obligation:

  1. When conducting a termination, be candid, reasonable, honest and forthright.
  2. Refrain from engaging in conduct that is unfair or in bad faith by being, for example, untruthful, misleading or unduly insensitive. The SCC in Keays gives the following examples of conduct in dismissal that could result in compensable damages:
    • attacking the employee’s reputation by declarations made at the time of dismissal;
    • misrepresentation regarding the reason for the termination decision; and
    • dismissal meant to deprive the employee of a pension benefit or other right, such as permanent status.
  3. Carefully consider and plan a termination involving an ill employee.
  4. Before alleging cause, make sure you have a reasonable basis to believe cause exists.