Since the Supreme Court of Canada’s decision in Keays v. Honda Canada last July, employment lawyers have wondered whether so called “Wallace” damages continue to exist, under what circumstances they might still be awarded, and if they had been subsumed into damages for mental distress.

A recent decision from the Ontario Court of Appeal sheds some interesting light on the issue. It also highlights that notice periods may be disproportionately long when an employee is terminated early on in the employment relationship.

The case, McNevan v. AmeriCredit Corp. [2008] O.J. No. 5081 involved the termination of an Assistant Vice-President of Collections, Mr. McNevan, who worked for AmeriCredit Corp., an auto financing company. McNevan was not with AmeriCredit long, as he was terminated within 13 months of joining the company.

The company terminated McNevan because they were not happy with his style of management as they felt it did not fit AmeriCredit’s expectations. The company did not provide any warning to McNevan about his management style before deciding to terminate his employment. The company terminated McNevan without cause and offered him three months pay in lieu of notice. McNevan refused the severance offer and subsequently sued AmeriCredit for wrongful dismissal.

The Trial Judge found that McNevan was entitled to six months’ notice, as well as an additional six months for the employer’s conduct both during and following termination. Specifically, the Court pointed to a range of factors including that the employer did not previously warn about the employee’s management style, that outplacement services were not provided, and that the company mishandled the provision of both the vacation pay and the Record of Employment.  

The Court of Appeal reduced the award to a total of six months. It found that although the employer’s actions were not perfect, they did not constitute the so-called “high-handed” conduct required to provide for additional “Wallace” type bad faith damages. The Court of Appeal also made it clear that employers are not legally obliged to provide post-termination assistance such as letters of reference, and are entitled to request the signing of a release in the process of settling an issue of severance.

While Mr. McNevan was not successful in obtaining damages for mental distress, a minority on the Court of Appeal thought that he was entitled to it. Their reasoning may illuminate the type of situations where an employee might be awarded these damages. The minority based its finding both on McNevan’s own testimony that he felt depressed and on the fact that a doctor prescribed him sleeping pills in relation to complaints regarding sleeplessness and depression. Although this analysis represented the minority opinion, it nevertheless suggests a lower threshold to a finding for mental distress damages than had generally been anticipated post-Keays.

Bad faith damages aside, the Court of Appeal found that an award of six months was not excessive even though the employee had only been with the company 13 months. The Court of Appeal pointed to the fact that McNevan held a management position and that comparable positions available to him were scarce at the relevant time.

What does this mean for employers?

Disproportionate notice for short-term employees

The Court of Appeal’s decision in McNevan reminds employers that short-term employees can be provided a disproportionately large amount of notice as compared to longer service employees. In so doing, courts will take into account several factors such as the nature of the employee’s position and the availability of comparable employment in determining appropriate notice periods. Therefore, when terminating employees with this profile, employers should keep in mind that the financial consequences to them may be higher than expected and planned.

Post-termination assistance

The Court of Appeal in McNevan made clear that employers are not under a legal obligation to provide a letter of reference. We would nevertheless recommend that employers strongly consider providing these letters and outplacement counselling to departing employees. First, a positive reference and/or outplacement can soften the blow of a termination, and create an environment in which a resolution to outstanding issues such as a severance package can be achieved. Second, there is no question that this type of support helps employees find new work quicker. This ultimately reduces the employer’s liability.

Damages for mental distress and the termination process

While the minority comments are not definitive on damages for mental distress, we take the fact that they considered awarding them in these circumstances – without a comprehensive medical report from a physician - as another reminder why it is important for employers to conduct terminations in a manner that is sensitive to the employee’s circumstances. If what is ultimately required is a low evidentiary threshold, as the minority seems to suggest, we can anticipate a revival of these types of damages.