eCaseNote 2008 No. 03

Employers No Longer “Walking on Eggshells” Supreme Court Curbs Punitive Damages in Wrongful Dismissals

Honda Canada Inc. v. Keays, 2008 SCC 39

In an important case for employers across the country, on June 27th, 2008 the Supreme Court of Canada (SCC) released the final judgment on this wrongful dismissal case, reversing the decisions of the Ontario Trial Division and Court of Appeal in regards to punitive damages and Wallace damages. We had previously reported on the lower courts’ decisions in our eCaseNote 2006 No. 09.

The SCC clarified that an award of punitive damages must be limited to situations where the actions of an employer are outrageous and malicious. As a result, employers will enjoy a little more leeway in administering employee disability programs which require independent medical examinations (IMEs) or other types of monitoring of work absences.

In the lower court decisions, the way in which Honda administered its disability program, especially the IME, was regarded as worthy of ordering punitive damages. Honda asked for the IME to determine if Mr. Keays was actually suffering from the ailment his own doctor had diagnosed. Honda had made the request after the doctor’s notes Mr. Keays produced seemed to lack any independent analysis. The lower courts interpreted this mandatory examination as a tactic to undermine Mr. Keays’ physician’s opinion, and the lower courts suggested that this whole process was to prove Mr. Keays wrong. The SCC disagreed with this interpretation, and found the IME to be a perfectly acceptable practice. In fact, the SCC accepted the need to monitor employees who are regularly absent from work as a bona fide work requirement in light of the fundamental nature of the employment contract and the employer’s responsibility for the management of its workforce.

Employers may now operate with the knowledge that punitive damages have been reined in and the courts will only apply them in extreme situations where the actions of an employer warrant punishment on their own. However, it is important to note that the SCC has not provided employers with immunity from punitive damages. Rather, it has clearly affirmed that such should be used only when the conduct of the employer has been “harsh, vindictive, reprehensible and malicious as well as extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment”.

In addition to overturning punitive damages, the SCC dismissed the previously awarded “Wallace” damages, which are awarded as a result of a particularly egregious manner of dismissal. The SCC affirmed that Wallace damages should only be awarded if an employer engages in conduct during the course of the dismissal that is unfair or in bad faith by being, for example, untruthful, misleading or unduly insensitive. The SCC did not find any of the practices used by Honda to be of this nature. The SCC also affirmed that, in determining damages from a dismissal, if the injury suffered was within the reasonable contemplation of the parties, then there is no need for the employee to prove an independent actionable wrong.

The SCC stressed that an employment contract is, in its very nature, always subject to cancellation on notice or payments in lieu of notice “without regard to the ordinary psychological impact of that decision”. The SCC was not willing to recognize normal distress and hurt feelings as compensable damages. An employer has to go beyond the normal dismissal process and act in an unfair way or in bad faith to attract Wallace damages.

The SCC also pointed out that arbitrary extensions of notice periods for Wallace damages are inappropriate. Instead, Wallace damages should be awarded only for actual damages suffered and assessed through normal common law principles. An employee must prove that the manner of dismissal caused extra-ordinary mental distress that was in the reasonable contemplation of the parties.

This case also afforded the SCC an opportunity to comment on the potential “pitfall” of doublecompensation stemming from confusion between punitive damages and Wallace damages. The SCC explained that compensation for injury suffered due to the nature of a dismissal must be handled through an award of Wallace damages, rather than used to justify punitive damages on its own. An extreme malicious act deserving of punishment is required to trigger the latter. The Court stressed that further court decisions must be guided by an understanding of the differences between the damages. The SCC warned that double compensation must be avoided, but it appears possible that both types of damages may co-exist if the threshold is met for both.

Another interesting point touched on by the SCC was its confirmation that a breach of human rights legislation (Codes) cannot be considered in itself to be an actionable wrong giving rise to punitive damages. The Codes are comprehensive statutory regimes and any breaches must be dealt with within that statutory regime.

Finally, the SCC also commented that an employer has no legal obligation to deal with an employee’s counsel while the employment relationship still exists. Employers remain free to interact directly with their employees. The SCC did find that Honda’s communication to Mr. Keays, that his decision to secure legal counsel “was a mistake”, was ill-advised and unnecessarily harsh, but did not cross over the extreme or malicious intent threshold that would attract the award of punitive damages.

This case touches on a number of important issues for employers. It is important to be aware of the SCC’s guiding precedents and to have an understanding of the boundaries in which a company can safely operate without fear of punitive damages. Punitive damages and Wallace damages, while curtailed in this particular case, are still very much a possibility if the facts of a situation call for them.

The comments contained in this eCaseNote provide general information only and should not be construed as legal advice or opinion. For more information or specific advice on matters of interest, please call our offices at (709) 579-2081.