Supreme Court Reverses Largest Wrongful Dismissal Punitive Damages Award in Canadian History

By Kate McNeill, Kelly McDermott, and Donovan Plomp
McCarthy Tetrault

On Friday, June 27, 2008, the Supreme Court of Canada (SCC) released its decision in Honda Canada Inc. v. Keays, reversing the largest award of punitive damages in a wrongful dismissal action in Canadian history. The decision is very favorable for employers.

Background
Kevin Keays was a long service Honda employee who was diagnosed with chronic fatigue syndrome in 1997. He returned to work after a period on long-term disability benefits. Honda exempted him from its attendance-related progressive discipline policy but required him to provide a medical note for each absence, which was not required of employees suffering “mainstream” illnesses.

Keays’ sporadic absences continued, and Honda hired Dr. B to assess Keays. Keays hired a lawyer, who wanted to clarify the purpose of the meeting with Dr. B. Honda refused to deal with Keays’ lawyer and made Keays subject to its attendance-related discipline policy. When he continued to refuse to meet with Dr. B without Honda clarifying the purpose of the meeting, Honda terminated his employment for insubordination.

Trial judge’s decision
The trial judge found there was no just cause for dismissal and awarded Keays 15 months’ damages in lieu of reasonable notice. In addition, he awarded a nine-month extension of the notice period (known as a Wallace extension) based on his finding of bad faith actions by Honda in the manner of dismissal.

The judge awarded a stunning $500,000 in punitive damages on the basis that Honda discriminated against and harassed Keays in the course of his employment.

The Court of Appeal’s decision
The Ontario Court of Appeal upheld the 15 months’ reasonable notice award and the nine-month extension of the notice period. While the Court of Appeal upheld the principle of a punitive damages award, it reduced the award itself from $500,000 to $100,000.

Supreme Court decision: key findings and implications for employers
The SCC upheld the award of 15 months’ damages in lieu of reasonable notice, but overturned the award of punitive damages and the nine-month Wallace extension of the reasonable notice period. The broader implications for all Canadian employers are as follows:

1. Elimination of the Wallace extension. In overturning the nine-month extension of the reasonable notice period, the SCC has done away with the Wallace extension, which was previously used to address bad faith conduct on the part of employers during the course of a dismissal. Employees may still be entitled to damages resulting from the manner of dismissal, but such damages will no longer be awarded by way of “an arbitrary extension of the notice period.” Instead, the employee will have to demonstrate that he or she has in fact suffered actual, compensable damages, which will be assessed accordingly.This may reduce routine claims for Wallace damages by terminated employees in circumstances where no actual damages have been suffered.
2. Limitation of the circumstances warranting punitive damages. In eliminating the punitive damages award entirely, the SCC has made it clear that such damages must be awarded only in “exceptional cases” where the employer’s “advertent wrongful acts . . . are so malicious and outrageous that they are deserving of punishment on their own.”
3. Prohibition on “double-compensation.” The SCC clearly stated that courts must “avoid the pitfall of double-compensation or double-punishment” by providing both bad faith damages and punitive damages in cases where such damages are not warranted or proven. If the award of actual damages serves to compensate the employee in such a case, as well as to deter future misconduct on the part of the employer, absent any other sufficiently egregious or outrageous behavior, no additional punitive damages should be awarded.
4. Discrimination as an independent actionable wrong. The SCC reaffirmed the principle that a civil action cannot be based directly on a breach of the Ontario Human Rights Code because “discrimination” cannot constitute an independent actionable wrong and because the Code already “provides a comprehensive scheme for the treatment of claims of discrimination.” This assists employers in arguing that such claims must be brought through the statutory mechanism provided under the Code, rather than in a civil action.
5. Employer’s ability to pursue absenteeism management plans. Finally, the SCC confirmed that an employer’s “need to monitor the absences of employees who are regularly absent from work is a bona fide work requirement in light of the very nature of the employment contract and responsibility of the employer for the management of its workforce.” This will strengthen an employer’s ability to manage absenteeism in the workplace and to pursue information and documentation from its employees in the context of such an exercise.