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Beyond Severance: Breaking Down Additional Damages for Bad Faith in Employment Law

Glen Stratton

October 26, 2022

What are bad faith damages?

In the context of workplace law, bad faith can be proven when an employer engages in unfair conduct in an employee’s dismissal, to the extent that the conduct causes the employee to suffer serious, prolonged mental distress.

Bad faith claims are concerned with the events leading up to the termination, the employee’s termination, and the way the termination is conducted. 

In 1997, the Supreme Court of Canada in Wallace v United Grain Growers Ltd., 3 SCR 701, offered some guiding principles for assessing and identifying what constitutes bad faith in a termination:

While the obligation of good faith and fair dealing is incapable of precise definition, at a minimum in the course of dismissal employers ought to be candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.

While this is a strong statement from the Supreme Court, it is important to note that an employer does not have to give reasons for terminating someone without cause, as long as they provide the employee with the severance amount that is due and owing to the employee. This could be based on length of service, reasonable notice pay, and/or contractual notice pay. This assumes that there is no binding and applicable probationary term in the employment contract that the employer could rely on to terminate the employee without providing notice pay. Based on this logic, the Supreme Court of Canada revisited the test for proving bad faith damages.

Bad faith damages were also referred to as “Wallace Damages” after the 1997 decision. Wallace Damages, when awarded, resulted in an extension of the reasonable notice period. However, in 2008, the Supreme Court of Canada revisited the test for bad faith damages in Keys v Honda Inc., 2008 SCC 39 (the “Honda Decision”), and how they were to be paid out or structured, and found that bad faith damages were a form of aggravated damages. For bad faith to be proven as of the Honda Decision, an employee must have suffered damages or a loss that extend farther than just the loss of being terminated.

The Supreme Court found that a key factor in a successful bad faith claim is the degree of mental distress experienced by the terminated employee. The Supreme Court recognized that terminations are not, by their nature, very pleasant. The sense of unfairness or regular upset an employee may feel upon being dismissed is not, in and of itself, sufficient to award bad faith damages. Given these findings, the Supreme Court found that rather than an arbitrary extension of the reasonable notice period, bad faith damages would be awarded based on the actual mental suffering and/or losses of the employee.

When do you get bad faith damages?

In order to receive damages in a claim of bad faith, an employee must prove that they were terminated in such a malicious manner that it caused mental distress to a degree, over and above the regular hurt feelings that an employee will usually suffer as a result of a termination. 

It is an implied term of any employment agreement that an employer has a duty to act in good faith with employees, even when terminating them. There is no legal way to contract out of that obligation, despite the fact that we see employment lawyers attempting this strategy.

What the courts look for in these claims is proof that the employer failed to be ‘open, reasonable, truthful and forthright’ with the employee, or acted in a way which was misleading or unduly insensitive.  The evidence needs to prove that the employer’s conduct caused the employee to suffer mental distress.

Misrepresentation can be another facet of this kind of claim. An example of misrepresentation in this context is the following: an employer misrepresents an employee by sending out emails to other prospective employers that claim bad deeds on the part of the former employee (leading to a hindering of that employee’s employability in their industry of work). To use this in a claim, the employee would have to show that these acts threaten the employee’s prospects of gaining employment in the same field or location. The courts do not look positively on the behaviour of a former employer who, after terminating an employee, attempts to hinder the employee’s ability to mitigate their damages and find comparable work elsewhere.

What evidence is needed to prove bad faith?

The evidence to prove bad faith as the cause of mental distress does not necessarily need to be proven by way of testimony from an expert, such as a psychologist. However, it certainly makes a stronger case for the plaintiff if there is evidence of the mental distress and its connection to a bad faith termination. A doctor’s notes or sworn testimony from the employee’s therapist could go a long way to show there was a causal link between the employer’s conduct, the manner of termination and the events that led up to that termination.

An employee could also make use of evidence from other witnesses, such as family members, friends, and former colleagues who can get on the stand and corroborate the employee’s claim by testifying they observed the terminated employee facing serious mental distress as a result of the employer’s actions and the manner of the termination. 

What is intentional infliction of mental suffering?

Interestingly, there is a tort in British Columbia that deals with Intentional Infliction of Mental Suffering by one party against another. It could be neighbour against neighbour or employer against employee. This is an additional avenue or cause of action for plaintiffs seeking damages for bad faith.

However, the courts have been conservative in finding for the plaintiffs in these cases because it is very difficult to prove a causal link between a plaintiff’s mental suffering and the intentional actions of another. It is not good enough to show that an individual continued to steal your lunch from the workplace lunchroom. You would have to show that this act was done intentionally to cause you mental suffering. It may be stealing, it may be wrong, but not necessarily rise to the standards necessary to win a claim with this particular tort.

It may be more prudent for an employee to pursue more certain claims, or negotiate with the employer and avoid court altogether.

Unlike this tort, where the employee must show there was a subjective intention to cause mental distress, pursuing damages through the bad faith avenue is probably more feasible. This is because the assessment of culpability by the employer is based on the objective reasonable person standard—an easier factor to assess.

What are punitive damages?

In a wrongful dismissal claim, any damages to the plaintiff are structured around their previous income and severance amounts, and therefore subject to statutory deductions. 

In a bad faith claim, the monetary award is based on either aggravated damages alone, or in some cases, a combination of aggravated and punitive damages, whose awards are not limited by statutory deductions

The addition of punitive damages in an award is essentially to penalize the employer as a public rebuke and to deter others from behaving similarly to their employees. 

The assessment of a damages amount

The courts will consider various factors in reaching what they deem an appropriate amount for damages. For example, if the termination was triggered by an improper investigation into the alleged wrongdoings of the employee, this could be a determining factor in the damages the court awards the plaintiff.  

Or, perhaps the employer attempted to respond to the bad faith claim by switching to a ‘just cause’ position with little to no evidence of such. Or perhaps they bring to bear the employer’s superior financial and legal resources to fight the employee in the hope the employee will become so intimidated they will drop the litigation. This David versus Goliath scenario may also factor in the damages the employer would be required to pay.

When all of the extenuating circumstances are taken into account, the employer may be found to have acted so egregiously that the plaintiff receives anywhere from $5000 up to $200,000, this latter amount far more the exception than the rule in BC. However, this higher amount is more likely to result in scenarios where employers carry out improper investigations that only cause additional mental distress on the employee.  It can also exacerbate the courts judgement that the employer engaged in particularly egregious conduct in the employee’s termination.


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