Northern Exposure

Don’t Let ‘Enhanced’ Severance Be a Surprise During Terminations

McCarthy Tetrault

Since the concept of at-will employment isn’t recognized in Canada, U.S. employers need to understand how terminations are handled in their operations north of the border. Are you confident that your termination decisions are in line with Canadian law? And what about the “enhanced” severance known as “Wallace damages”? Are you clear on that concept?

Here’s a key difference between United States and Canadian employment laws: In Canada, unless termination is for just cause, employees are entitled to notice or payment in lieu of that notice. Also, unless an employment agreement expressly provides otherwise, the courts may allow a terminated employee notice or payment of an amount that the court considers reasonable.

This “reasonable” notice or pay is based on the employee’s age, position, length of service, and the availability of alternative employment. Such notice is usually more than the statutory minimum. Plus, the courts can award extra notice or pay if the employee has been treated unfairly during termination. So it’s important that you understand what you’re up against when letting employees go.

Some background

In 1997, the Canadian Supreme Court decided in Wallace v. United Grain Growers Ltd. that employers have an obligation of “good faith and fair dealing” in the way they dismiss an employee. Breaching that obligation can result in a notice or pay in lieu of notice requirement greater than the normal “reasonable” requirement. This increased notice is known as “Wallace damages.”

The Supreme Court didn’t specify how much should be added to the reasonable notice period for a breach of the duty of good faith and fair dealing. Nor did it define specifically under what circumstances the amount should be enhanced.

Ever since the Wallace decision, the lower courts have been trying to sort out how to apply its principles, sometimes with conflicting results. Two British Columbia court decisions reflect this inconsistency.

· In Hill v. Johnson Controls L.P. (2006), the employer was found liable for Wallace damages after it initially refused to pay all the commissions a terminated employee believed he was entitled to receive. The employee was a 50-year-old professional engineer who was hired to sell contracts for the installation of electrical and mechanical systems in commercial buildings. He was employed from July 2001 until March 2005.

The commission plan stated that only those actually working for the company on the last working day of the month would be eligible for commissions for that month. The employee was dismissed without cause three days before the end of March and was paid six weeks’ pay in lieu of notice.

The employer maintained that the employee wasn’t entitled to commissions for March because he was terminated before the end of the month. About a month after his dismissal, however, after he had pursued the matter with the employer’s main office in the United States, the company agreed to pay him the commissions for March.

In determining the reasonable notice period, the court found that, in most ways, the employer’s conduct in the dismissal was appropriate and reasonably sensitive. The court found, however, that the employer’s initial refusal to pay the employee the March commissions constituted bad-faith conduct because it “needlessly and unreasonably added to the stress and anguish that inevitably accompanies any dismissal.”

As a result, the employee was entitled to an increase in the notice period for the company’s bad-faith conduct. The court awarded a notice period of 12 months, including Wallace damages. The portion attributable to Wallace damages wasn’t specified.

· By contrast, in Stant v. Elaho Logging Ltd. (2006), the employer dismissed the employee in a harsh and critical manner and made allegations of theft. The employer also didn’t pay the employee in lieu of notice or his bonus until shortly before trial. In Stant, however, the court didn’t award Wallace damages because, after receiving legal advice, the employer attempted to make amends one month after termination by offering the employee his job back.

The court held that the employer’s conduct didn’t amount to bad faith in all of the circumstances and didn’t justify extending the notice period to provide for Wallace damages.

It’s difficult to reconcile these two cases. In both cases, the employer attempted to rectify “bad faith” conduct approximately one month after termination. In Stant, the employer’s conduct was arguably much more serious than in Hill and yet no Wallace damages were awarded, whereas in Hill, they were. These cases illustrate how difficult it is to predict the circumstances in which Wallace damages will be awarded.

What should you do?

Here’s some advice. When terminating employees:

· Treat them fairly, reasonably, and honestly.
· If a mistake has been made, correct the error as soon as possible.

Assisting a departing employee in some way will generally help to avoid Wallace damages. Examples might include providing a letter of reference or outplacement counseling by a third party.