Bad Faith in the Manner of Dismissal
16th Annual Hamilton Law Association Employment Law Seminar
November 14, 2019
Nolan, Ciarlo LLP
1 King Street West, Suite 700
Recently, the Ontario Court of Appeal upheld a $100,000 bad faith damages award in a wrongful dismissal case and commented that such an amount was well within the range of recent awards where employees were mistreated in their manner of termination. This exemplifies the growing significance of these types of damages and signals that they may be on an upward trajectory.
Bad faith damages in employment law cases are often overlooked and misunderstood. It is important for employee-counsel to know how and when to make a claim for bad faith damages and it is important for employer-counsel to know how to respond to these claims and advise employers how to avoid them in the first place.
How did we get here?
Damages for bad faith dismissal have been around for a long time as a result of the longstanding recognition by Canadian courts of the unequal bargaining power between workers and employers. As the Supreme Court noted in Wallace v. United Grain Growers Ltd.,  3 SCR 701, “this power imbalance is not limited to the employment contract itself. Rather, it informs virtually all facets of the employment relationship.” In the absence of a labour union, the average employee lacks the ability to negotiate favourable contractual terms and is vulnerable to life-altering dismissal essentially at the employer’s whim.
The Supreme Court commented on this inequality in Slaight Communications Inc. v. Davidson,  1 SCR 1038, noting that “the relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power. In its inception it is an act of submission, in its operation it is a condition of subordination” (emphasis added).
This kind of contractual inequality is all the more problematic given the importance of work in a person’s personal and financial life. In Reference Re Public Service Employee Relations Act (Alta.),  1 SCR 31, the Court noted that “work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.” As such, for an employee, the involuntary termination of the employment relationship is wrought with profound emotional and psychological complications: “Any change in a person’s employment status is bound to have far-reaching repercussions…[and] when this change is involuntary, the extent of our ‘personal dislocation’ is even greater.”
It was the unique combination of inequality in bargaining power coupled with the importance of work in a worker’s life, that caused the Supreme Court to first recognize a duty on the part of employers to treat employees with good faith at the time of dismissal. The seminal case in this regard was Wallace v. United Grain Growers Ltd. (supra) where the court recognized that the point at which the employment relationship ruptures leaves the employee so vulnerable that an additional layer of legal protection is required. The court wrote that: “The law ought to encourage conduct that minimizes the damage and dislocation (both economic and personal) that result from dismissal. To ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal.”
This principle continues to lie at the root of the doctrine of bad faith dismissal and damages will be available where “an employer engages in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.” Of course this does not mean that the normal distress and hurt feelings associated with losing one’s job are compensable; nor that the employer has an obligation to provide a good faith rational for dismissal. It simply means that employers have to be sensitive to the aforementioned power imbalance and importance of work in a worker’s life, and where an employer’s “insensitive, demeaning or humiliating” treatment of an employee causes provable mental distress, damages for bad faith in the manner of dismissal should be awarded.
Moral and Aggravated Damages
In the Wallace era, the method for compensating an employee dismissed in bad faith was to simply lengthen the applicable notice period. This was an awkward approach which resulted from the old rule in contract cases that aggravated damages could not be awarded for mental distress stemming from a breach of contract unless there was an independent actionable wrong. In employment cases, it was recognized that losing one’s job often caused mental distress and this was not itself compensable: “damages cannot be increased by reason of the circumstances of dismissal whether in respect of the [employee’s] wounded feelings or the prejudicial effect upon his reputation and chances of finding other employment.” Instead, damages were only available to remedy the breach of contract itself – taking the form of compensation for an employer’s failure to provide notice.
In 2006, the Supreme Court released Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 which established that damages for mental distress in breach of contract cases can be awarded without any requirement to show that there was an independent actionable wrong. The rational in Fidler was that contracts may confer both a psychological benefit as well as a material benefit, and therefore a breach of the psychological element of the contract may directly result in mental distress damages.
It was Fidler’s reworking of this concept of aggravated / compensatory damages that “mandated a re-evaluation” of Wallace damages by the Supreme Court. This re-evaluation was achieved in Honda Canada Inc. v. Keays, 2008 SCC 39.
In Honda, the court clarified that all employment contracts are presumed to be entered into with the expectation that the employee will be treated in good faith upon dismissal. In other words, fair treatment upon dismissal is a presumed psychological element of all employment contracts in addition to the presumption that reasonable notice of termination will be provided. In this sense, damages for bad faith dismissal become just like any other breach of contract damages – they are damages that may fairly be considered either arising naturally from the contractual breach or damages that were within the reasonable contemplation of the parties at the time the contract was entered into. Honda and Fidler stress that this approach is most consistent with the seminal contracts case of Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145.
In Honda, the court called these mental distress damages “moral” damages. They are not true “aggravated damages” in the pre-Fidler sense because no independent actionable wrong is required, but the distinction is no longer important and bad faith damages are routinely referred to as aggravated or compensatory damages by the courts (as well as “Honda damages” and “Wallace damages”). Honda summarized the principle as follows: “If the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded… through an award that reflects actual damage.”
More recently the Ontario Court of Appeal in Boucher v. Wal-Mart Canada Corp., 2014 ONCA 419 summarized the principle again and noted that: “Aggravated damages are compensatory damages. They are part of breach of contract damages. They compensate a plaintiff for the additional harm suffered because of the way the contract was breached. In a wrongful dismissal claim, aggravated damages may be awarded against the employer where “the employer engaged in conduct during the course of dismissal that is “unfair or is in bad faith.’”
Based on the foregoing, it is no longer necessary to engage in an analysis as to whether there is an independent actionable wrong, nor whether moral damages are one and the same as aggravated damages. Interestingly however, punitive damages in breach of contract cases do require an independent actionable wrong as clarified in Whiten v. Pilot Insurance Co., 2002 SCC 19. Courts have held that bad faith dismissal constitutes an independent actionable wrong for the purpose of awarding punitive damages in wrongful dismissal actions.
Bad Faith in Practice
The bad faith analysis is heavily fact-driven and case-specific. However, the higher courts have repeatedly used overlapping terminology in attempting to describe the sort of employer conduct that would be considered bad faith, referring to conduct that could be considered: untruthful, misleading, insensitive, humiliating. Some common and reoccurring themes where employer conduct has attracted bad faith damages include the following:
- False allegations of cause or incompetence
- Harming the employee’s reputation or causing embarrassment at the time of dismissal
- Harassment or sexual harassment prior to dismissal
- Dismissal connected to disability
Of all of these, probably the most common are dismissals followed by untruthful allegations against the employee meant to “justify” the dismissal and cases where an employee was harassed during or leading up to dismissal.
It is also common for an employer’s violation of human rights legislation to be scrutinized through the bad faith lens and for independent damages to be awarded for such a violation in addition to damages which might be awarded under the human rights framework.
The Court of Appeal concluded in Doyle v. Zochem Inc., 2017 ONCA 130 that, since human rights damages are designed to “compensate for the intrinsic value of the infringement of rights under the Code” it does not constitute double recovery for the court to award Human Rights Code general damages and aggravated / moral damages for bad faith in the manner of dismissal even where the same fact scenario gives rise to both claims.
Employees must show actual mental distress to recover damages for bad faith in the manner of dismissal but need not do so with medical evidence nor by proving an actual psychological illness. Referring to this issue but in the tort law context, the Supreme Court commented in Saadati v. Moorhead 2017 SCC 28, that “mechanisms by which some courts have historically sought to control recovery for mental injury are, in my respectful view, premised upon dubious perceptions of psychiatry and of mental illness in general, which Canadian tort law should repudiate… A finding of legally compensable mental injury need not rest, in whole or in part, on the claimant proving a recognized psychiatric illness.”
Post Dismissal Conduct
One particularly interesting aspect of the evolution of the doctrine of bad faith dismissal has been the clear inclusion of post-dismissal conduct. The flexibility and potential impact of this inclusion is important.
The Court of Appeal clarified in Doyle that “Pre and post termination conduct may be considered in an award for moral damages, so long as it is a component of the manner of dismissal.” How courts define “a component of the manner of dismissal” when dealing with conduct that occurred after dismissal, has been very broad. The following post-dismissal employer conduct has been found to constitute or contribute to a finding of bad faith in the manner of dismissal:
- Pressuring an employee to accept an inadequate severance package by using false cause allegations as a negotiation tactic or otherwise advancing a baseless allegation of cause leading up to trial
- Failing to meaningfully participate in a scheduled mediation
- Failing to produce obviously relevant documents during the course of litigation
- Failing to communicate with Plaintiff’s counsel, to answer questions, or professionally respond to the Plaintiff’s position
- Refusing, during the course of negotiations, to pay already-earned commissions which were acknowledged to be owing
- Refusing to answer undertakings
- Refusing to provide a letter of reference in the absence of real performance concerns
- Delaying in sending the employee her Record of Employment and frustrating her application for Employment Insurance
- Failing to pay statutory minimums upon termination
- Acting indifferent toward the Plaintiff “to the point of disdain”
- Adopting a tactic of “attrition” in hopes that the employee will eventually give up and go away
The foregoing is usefully summarized by the Court of Appeal statement in Marshall v. Watson Wyatt & Co.  O.J. No. 84 that “Wallace is a call for employers not to ‘play hard ball’ with employees when dismissing them.” A warning against playing hard ball with an employee upon dismissal might be counter-intuitive for over-zealous defence counsel and is therefore of particular relevance to employment law bar.
The general rule is that improper and heavy-handed conduct in the course of litigation ought to be dealt with and sanctioned by an elevated costs award – not through punitive or aggravated damages. However, in the recent case of Galea v. Wal-Mart Canada Corp., 2017 ONSC 245 the court declared an “exception” to this rule for moral damages “where the evidence proves on the balance of probabilities that an employer has acted in bad faith, and that bad faith is manifested by the decisions and conduct of an employer or counsel acting on the employers’ instructions to frustrate or deny the rights of an employee” (emphasis added). The court went on to find that litigation delay and disdainful and frustrating conduct by the employer was grounds for a whole separate award of bad faith damages in addition to the bad faith damages already awarded arising out of the dismissal itself. The court noted, in a quote that ought to become well-referenced: “Attrition is not a friend of justice.”
None of the foregoing should be taken to mean that a respectful, vigorous defence will be considered bad faith. But where an employer crosses the line and attempts to use its inherent power over an employee in a heavy handed and insensitive manner – even during the litigation process – such conduct may attract a hefty bad faith award where the employee suffers mental distress as a result.
Quantum of Bad Faith Damages
Most recently, in Colistro v. Tbaytel, 2019 ONCA 197, the Court of Appeal was asked to review the question of just how much bad faith damages in the manner of dismissal are worth. The court was asked to review a $100,000 moral damages award on the basis that the trial judge had provided no breakdown or explanation of the dollar amount. The court easily concluded that $100,000 was well within the established amounts and referred to the two Wal-Mart decisions: Boucher and Galea (supra), as well as Strudwick v. Applied Consumer & Clinical Evaluations Inc., 2016 ONCA 520.
Galea represents the high-water mark of bad faith damages in employment law. In that case, the employer was not forthright with the employee in the drawn-out, 10 month process leading up to her dismissal. Thereafter, the employer ‘played hard ball’ with the employee over the course of litigation. She was awarded $250,000 in bad faith damages alone.
In Boucher, the Court of Appeal upheld a $200,000 bad faith damages award where the employee had been harassed and reprised against, and where the employer failed to take the employee’s harassment complaint seriously, eventually triggering her constructive dismissal.
In Strudwick, the employee was tormented and harassed in connection with her disability. The employer failed to accommodate her disability, invited the employee to quit, and insulted her in front of her colleagues at the time that she was fired. Bad faith damages were assessed at $70,000 and would likely have been higher but for the partial overlap between various heads of damages in that case including damages awarded for breach of the Human Rights Code ($40,000), and for the tort of intentional infliction of mental suffering ($35,294).
Tax Treatment of Bad Faith Damages
Employee counsel will often seek to characterize all or part of a settlement as tax-free for the benefit of the employee, so that she can keep more of her settlement funds. This approach can also benefit employers who might be able to adequately compensate an employee with fewer gross dollars. Caution is required when structuring tax-free allocations in wrongful dismissal settlements. Nevertheless, they are commonplace when there are alleged violations of an employee’s human rights. There is no question that general damages under the human rights framework are non-taxable. However, whether or not bad faith damages ought to be subject to regular withholding tax is not entirely clear.
Section 248(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp), defines a retiring allowance as any amount received by a taxpayer “in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgement of a competent tribunal” (emphasis added). Arguably, this language contemplates things like severance pay and wrongful dismissal damages. However, a 2016 Canada Revenue Agency bulletin expanded on the scope of retiring allowances, noting that any damages paid which are directly connected to the loss of employment are considered a retiring allowance and taxable as such – even damages meant to compensate an employee for mental anguish arising from the loss of employment.
Damages for bad faith in the manner of dismissal are, by their very nature, connected to loss of employment. But does this mean they will always be taxable? The CRA’s test is as follows:
- But for the loss of employment would the amount have been received? and;
- Was the purpose of the payment to compensate a loss of employment?
Only if the answer to the first question is “no” and the answer to the second question is “yes”, will the amount received be considered a taxable retiring allowance.
One might reasonably argue that a payment to an employee to compensate for the mental distress arising out of the manner of dismissal (such as harassment leading up to and at termination), falls outside the ambit of the second question, because such damages are designed to compensate the employee for something other than the loss of employment per se and are meant to compensate the employee for a breach of the psychological element of the employment contract which only indirectly relates back to the loss of employment.
The Court of Appeal recently added to the ambiguity on this question when dealing with the matter peripherally in Colistro v. Tbaytel 2019 OJ No 1265. In that appeal, one of the issues was whether the trial judge correctly awarded costs against the otherwise successful Plaintiff given that the employer had made a superior offer to settle prior to trial. On appeal, the Plaintiff argued that the trial judge ought to have considered the tax free nature of the bad faith damages award when determining whether the employer’s net pre-trial offer was in fact superior to the trial award. The Court of Appeal declined to interfere with the trial judge’s cost award noting only that the test for leave to appeal a cost award is stringent and that the appellant didn’t pass the test. However, the court did not clarify, correct or contradict the employee’s assertion that the $100,000 bad faith award was tax free.
Parties should be careful about settling employment disputes with bad faith damages sheltered from withholding tax. They should not do so unless there are clear and bona fide issues of bad faith conduct by the employer, real mental distress damages sustained by the employee, and a legitimate argument to be made that the damages are not intended to directly compensate the employee for the loss of employment. Employers will want to insist on proper tax indemnification language in the settlement Release, and Employees should always be cautioned about the possibility (however slim) that the CRA might review and disagree with the manner in which the settlement was allocated and paid.
Unfortunately, bad faith conduct on the part of employers is all too common. As such, it is a welcome development that employees can be compensated with significant damages where serious injuries have resulted from unfair employer conduct – even conduct after lawyers have entered the picture.
Counsel on both sides of the employment nexus ought to be on the lookout for bad faith conduct which might work its way into the negotiation and litigation process and should not fail to identify it and call it out for what it is. After all, employment relationships are about respect, not hardball. Real life is not a game and human beings are vulnerable. The bearers of power must remember that – or pay the cost.
Ned Nolan, October 2019
 Colistro v. Tbaytel, 2019 ONCA 197
 Wallace, supra 2
 Boucher v. Wal-Mart Canada Corp., 2014 ONCA 419
 See: Vorvis v. Insurance Corp. of British Columbia,  1 S.C.R. 1085
 Peso Silver Mines Ltd. (N.P.L.) v. Cropper,  S.C.R. 67
 Boucher, supra 4
For example: Johnston v. Arran-Elderslie (Municipality),  O.J. No. 6702 ($100,000 awarded), Horner v. 897469 Ontario Inc. o/a Superior Coatings, 2018 ONSC 121 ($20,000 awarded), Morison v. Ergo-Industrial Seating Systems Inc. 2016 ONC 6725 (Bad faith found but no damages proven)
 For example: Johnston v. Arran-Elderslie (Municipality),  O.J. No. 6702
 For example: Boucher supra 4 ($200,000 awarded)
 For example: Doyle v. Zochem, 2017 ONCA 130 ($60,000 damages awarded)
 For example: Strudwick v. Applied Consumer & Clinical Evaluations Inc., 2016 ONCA 520 ($70,000 awarded)
For example: Cooper v. 580 Christie Street Co-Ownership Inc., 2014 ONSC 4649, Horner v. 897469 Ontario Inc. o/a Superior Coatings, 2018 ONSC 121, Guitard v. Harb (c.o.b. La Luna Restaurant Concession),  O.J. No. 7014
 Canada (Attorney General) v. Robitaille,  F.C.J. No. 1494
 Saadati v. Moorhead, 2017 SCC 28
 For example: Antidormi supra 16
 For example: Galea v. Wal-Mart Canada Corp., 2017 ONSC 245
 For example: Galea, supra 18
 For example: Antidormi supra 16
 For example: Galea, supra 18
 For example: Galea, supra 18
 Income Tax Folio S2-F1-C2