When Will an Employer Be Liable for Bad Faith Damages?

Since the Supreme Court of Canada’s decision in Honda Canada Inc. v. Keays, 2008, dismissed employees have increasingly sought bad faith damages in severance negotiations and wrongful dismissal actions. A key issue in these claims is whether the employer’s conduct was sufficiently egregious to justify these damages. The courts are clear that not every perceived offence or instance of misconduct will give rise to a finding of bad faith.

The authorities establish that bad faith is akin to malice or blatant disregard for the employee. The conduct must be reprehensible or egregious. In Honda v. Keays, the Supreme Court set out the following examples of dismissals conducted in bad faith:

• The employer making declarations that result in an attack on the employee’s reputation at the time of the dismissal
• The employer misrepresenting the reason for the termination
• Dismissal with the intent to deprive the employee of a benefit, such as a pension

If an employee establishes that the employer acted in bad faith, she or he must still establish actual loss caused by the misconduct in order to be awarded damages. Bad faith damages are compensatory rather than punitive. That is, they are meant to compensate the employee for damage that they suffered rather than punish the employer for their misconduct. Accordingly, an employee must be able to prove actual loss due to psychological damage or mental distress in order to be awarded bad faith damages. In most cases, this will require the employee to produce medical evidence in support of their claim. However, it is worthy of note that some cases have departed from the approach set out in the authorities and awarded damages based on the bad faith conduct itself without evidence of mental distress.

In Evans v. Complex Services Inc, 2012, the Ontario Superior Court of Justice considered a claim for bad faith damages arising from the manner of an employee’s dismissal. The day before her termination, the plaintiff had overheard a manager state that the plaintiff was “getting canned” the next day. However, when the plaintiff confronted management about this remark, they were not truthful and allowed her to continue working overtime under the belief she was not being fired.

The Court stated that, given the imbalance of power between the management and the employee, the failure to tell her the truth was unfair and cruel. The plaintiff testified she suffered depression after being terminated and required medication. However, no medical evidence was offered to establish whether her depression was the result of the management’s mistreatment of her or whether it flowed from the loss of her employment.

The Court found that the management’s conduct did not reach the requisite level of misconduct for a finding of bad faith. Further, the evidence did not establish that the misconduct caused or contributed to the employee’s depression. The Court held that the employee was not entitled to damages for depression caused by the loss of her job. Rather, there must be misconduct in the manner of dismissal of a sufficiently egregious nature to justify an award of bad faith damages.

This decision is useful for employers in responding to unfounded claims for bad faith damages in severance negotiations. It affirms the principle that an employee is not entitled to damages for mental distress caused by the termination itself. The employee must adduce evidence of actual harm caused by the employer’s misconduct in order to make out a claim for damages. The case also illustrates the high threshold for a finding of bad faith conduct. Despite the stringent requirements for bad faith damages, employers would be well-advised to treat their employees with civility, decency and respect, both during the employment relationship and at the time of dismissal.