The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 7
Reassessing “Good Faith” in Contracts of Employment under Canadian Common Law
Kenneth Wm. Thornicroft, Professor, Gustavson School of Business, University of Victoria, Canada
ABSTRACT
“Good faith” has long been a central element of many types of contracts under Canadian common law. There are implied good faith obligations in employment contracts, but these obligations are somewhat asymmetrical with most being owed by employees to their employers. However, in recent years, Canadian courts have expanded the nature and extent of good faith obligations owed by employers to their employees. In 2014, the Supreme Court of Canada declared that good faith was an “organizing principle” affecting all contracts, including employment agreements. A critical question is whether this new “organizing principle” will create additional good faith obligations for employers. That question is the focus of this study. I review the case law from 2014 to date dealing with the “good faith” principle in the context of employment and quasi-employment (e.g., dependent contractor) relationships and discuss to what extent this new organizing principle has affected the employment relationship and, in particular, whether it has established new duties for employers vis-à-vis employees.
INTRODUCTION
In 2014 the Supreme Court of Canada (“SCC”) declared that “good faith” is an organizing principle that underlies all contracts and that, at its core, obliges contracting parties to adhere to a basic level of honesty and fairness in their dealings inter se (Bhasin v. Hrynew, 2014). This new approach was certainly novel within the framework of Canadian common law (O’Byrne and Cohen, 2015). In this article, I examine how this new organizing principle has been used to expand employer obligations toward their employees.
“Good faith” has long been a central element of many types of contracts. For example, in agency agreements the agent owes a duty of good faith toward their principal (Jostens Canada Ltd. v. Gibsons Studio Ltd., 1997), the insured and insurer have mutual good faith obligations in insurance contracts (Whiten v. Pilot Insurance Co., 2002; Fidler v. Sun Life Assurance Co. of Canada, 2006) and certain good faith obligations are implied in a tendering process (Martel Building Ltd. v. Canada, 2000; Continental Steel Ltd. v. Mierau Contractors Ltd., 2007). There are implied good faith obligations in employment contracts, but these obligations are somewhat asymmetrical. For example, an employee owes a duty of good faith, loyalty and faithful service to his or her employer (RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008), but an employer need not have a good faith justification for summarily dismissing an employee (Wallace v. United Grain Growers Ltd., 1997). Canadian courts will enforce restrictive covenants that limit a former employee’s ability to establish or work for a competing business, or to solicit the former employer’s customers and employees, provided the restrictions are broadly reasonable as to scope and duration (Elsley v. J.G. Collins Ins. Agencies, 1978). But employers are under no legal obligation to provide a departing employee (whether voluntary or involuntary) with a reference
letter which might assist the employee in securing new employment (Dupuis v. Edmonton Cellular Sales Ltd., 2006).
Historically, Canadian common law referred to what we today call “employment law” as the law of
“master and servant”. And for good reason – “servants” were subject to fines and possibly imprisonment for deserting their duties; servants were routinely subjected to corporal discipline in both Canada and the United States until the late 1800s (Vail, 2012; VanderVelde, 2016). Prior to 1875, a servant’s breach of an employment contract was a criminal offence although a master’s breach was not. Although masters could summarily terminate a servant for cause, non-payment of wages only enabled the servant to sue for their unpaid wages; if the servant refused to work despite not being paid, that constituted a breach of the servant’s duties of loyalty and faithful service (Echlin, 2010). There was no minimum wage legislation in British Columbia prior to 1918. The province’s Master and Servant Act was not repealed until 1979 when the first comprehensive employment standards legislation was enacted.
However, both society and the common law evolve. Unlike the situation in the United States, where the notion of an at-will employment relationship still largely subsists, the Canadian common law courts, commencing in the early 1900s, developed the notion of “reasonable notice” – in other words, in an employment contract of indefinite duration, either party could lawfully terminate the agreement without lawful cause, but only by giving a reasonable amount of prior notice (although most judicially defined notice periods were modest, rarely exceeding six months: see, for example, Hague v. St. Boniface Hospital, 1936). Thus, employers must provide the requisite “working notice” or pay an equivalent amount of severance pay in lieu of notice. Reasonable notice awards – particularly where an employer dismisses an employee without just cause – have increased over time to the point where, today, reasonable notice periods can extend to as much as 30 months’ notice (Saikaly v. Akman Construction Ltd., 2019).
Employers may summarily dismiss an employee without any notice (or pay in lieu of notice) if there is “just cause” for dismissal. “Just cause” arises where the employee has committed a repudiatory breach of the employment contract. As a matter of general contract law, the repudiation of a contract gives the party not in breach the immediate right to terminate the agreement. While any serious employee breach could constitute a repudiation, in most cases, the breach flows from the employee’s implied duty of good faith. The employee’s good faith obligations can be traced back to at least 1886 when Lord Esher of the English Court of Appeal stated: “…where a person has entered into the position of servant, if he does anything incompatible with the due or faithful discharge of his duty to his master, the latter has a right to dismiss him” (Pearce v. Foster, 1886).
THE EMPLOYEE’S DUTY OF GOOD FAITH
Although employees owe an implied duty of good faith toward their employers, historically, no correlative obligation was imposed on employers. Thus, for example, in 1909 the English House of Lords affirmatively rejected a servant’s claim for damages based on the “abrupt and oppressive way in which [his] services were discontinued” (Addis v. Gramophone Co., 1909). A master could dismiss a servant for any reason, or no reason at all, provided proper notice (or pay in lieu) was provided. Save for the intercession of contemporary statutory schemes, such as human rights and occupational health and safety legislation, that situation still pertains. An employee’s duty of good faith obliges an employee to render loyal and faithful service. Employees must refrain from competing with their employers, or accepting employment with a competing firm, while still employed (Restauronics Services Ltd. v. Nicolas, 2004;
The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 9 RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008) and must fully disclose all information that is relevant to the employment relationship (King v. Mayne Nickless Transport Inc., 1994).
At this juncture, it is important to stress that the employee’s duty of good faith and loyal service binds all employees irrespective of their particular role or duties. Of course, the scope of the employee’s authority shapes the nature of the duties owed. For example, a branch manager of an investment brokerage office breached his duty of good faith and loyal service when he orchestrated the mass exit of the branch’s twelve investment advisors in order to join a competitor firm; the investment advisors’ (none of whom was subject to any form of restrictive covenant) only breach was in resigning without proper notice (RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008). The branch manager was liable for over $1.5 million in damages whereas the investment advisors were only collectively liable for
$40,000 in damages based on their failure to give 2.5 weeks’ notice of resignation. Some high level employees can be characterized as fiduciaries given their significant autonomy and decision-making authority – such employees have additional, more onerous obligations that typically bind them even after the employment relationship has ended (GasTOPS Ltd. v. Forsyth, 2012). My focus here, however, concerns the good faith obligations of employees and employers where there is no fiduciary relationship.
THE EMPLOYER’S GOOD FAITH OBLIGATIONS
Historically, there was no overarching implied duty of good faith binding employers in their dealings with their employees. Employers were (and remain) free to, for example, withhold plans regarding a proposed sale of the business, or business closure, from employees – even from those employees who would be directly affected. The employer’s obligations were limited to those expressly set out in an employment contact or in other employment-related statutes. Employers were not required to have lawful (or, indeed, any) justification for dismissing an employee. In the latter case, and assuming no cause for dismissal, employer liability only arises if the employee was dismissed without proper notice or severance pay in lieu of notice. An employer could also be held liable if it either substantially breached the employment contract, thereby triggering the employee’s right to sue for “constructive dismissal” (Re Rubel Bronze & Metal Co., Ltd. and Vos, 1918), or if the employer breached certain statutory obligations owed to an employee (for example, under employment standards legislation).
There were, however, two relatively long-standing “good faith” obligations that bound employers in their dealings with employees. First, one recognized exception to the legal tenet that an employer can dismiss an employee without having a bona fide reason concerns the dismissal of a probationary employee. Although an employer may dismiss a probationary employee despite there being no just cause to do so, the dismissal must be predicated on a good faith assessment of the individual’s suitability for continued employment (Jadot v. Concert Industries Ltd., 1997; Nagribianko v. Select Wine Merchants Ltd., 2017). Second, if an employee’s contract includes provisions for a “bonus”, including those payable at the discretion of the employer, the employer is bound by a duty of honesty and good faith in determining whether the employee will receive a bonus (Greenberg v. Meffert et al., 1985).
In recent years, Canadian courts have expanded the nature and extent of good faith obligations that employers must observe vis-à-vis their employees. The tide in favour of greater good faith obligations binding employers began to turn in the late 1980s when Chief Justice Dickson of the Supreme Court of Canada made the following observation about the nature of work in Reference Re Public Service Employee Relations Act (Alta.) (1987):
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. Accordingly, the conditions in which a person works are highly significant in shaping the whole compendium of psychological, emotional and physical elements of a person’s dignity and self-respect.
In 1992, the SCC referred to the Alberta P.S.E.R. Reference decision, and the inherent power asymmetry in employment relationships, in holding that only a lawful notice provision in an employment contact could displace the employer’s implied obligation to provide reasonable notice of termination (Machtinger v. HOJ Industries Ltd., 1992). The employer argued that since the two dismissed employees agreed, in writing, to accept notice of termination that fell below the minimum statutory standard (0/2 weeks’ notice versus 4 weeks’ minimum notice mandated by employment standards legislation), they should receive only the absolute statutory minimum. The court rejected that position and awarded the employees severance pay based on 7 and 7.5 months’ notice, respectively.
In a later decision, the SCC specifically rejected the submission that it “should imply into the employment contract a term that the employee would not be fired except for cause or legitimate business reasons” (Wallace v. United Grain Growers, 1997). However, the court also noted that “when termination is accompanied by acts of bad faith in the manner of discharge, the results can be especially devastating [and] 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, the breach of which will be compensated for by adding to the length of the notice period.” The employer’s good faith duty was defined as follows:
“…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.” Accordingly, and following Wallace, supplementary notice awards would be made where, for example, the employer made unfounded allegations of just cause, unreasonably refused to provide a reference letter or other records required for employment insurance purposes, unreasonably failed to pay final wages due, or where the discharge constituted retaliation against a whistleblower or against an employee who was asserting a statutory right or entitlement.
In 2008, the SCC reversed course, holding that bad faith in the manner of dismissal should not be treated as a factor justifying a longer notice period; rather, where there is evidence of both employer bad faith or other misconduct and proof of actual injury, the appropriate remedy is a damages award reflecting the gravity of the injury (Honda Canada Inc. v. Keays, 2008). The effect of Honda was to reduce both the frequency of bad faith damage awards and the absolute monetary value of bad faith damages when actually awarded. A recent study (Curran, 2018) showed that following Honda, employees seeking bad faith damages were approximately 10% less likely to succeed (relative to employees claiming an extension of the notice period under the Wallace framework) and that, when awarded, bad faith damages were about $5,000 less compared to the pre-Honda “Wallace era”.
The SCC issued two other crucial decisions in the pre-Bhasin era. In the first, the court refashioned the common law surrounding “just cause” by introducing the notion of “proportionality” (McKinley v. BC Tel, 2001). The traditional common law position was that even relatively minor dishonesty gave an employer just cause for dismissal because of its revelatory character. For example, in McPhillips v.
British Columbia Ferry Corporation (1994), the British Columbia Court of Appeal observed that
“dishonesty is always cause for dismissal because it is a breach of the condition of faithful service [and] it is the employer’s choice whether to dismiss or to forgive.” In McKinley, the SCC once again acknowledged the vulnerability of employees and the power imbalance inherent in many employment relationships. The court
The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 11 rejected an absolute rule in favour of an analytical framework that “balance(s)…the severity of an employee’s misconduct and the sanction imposed [and] examines each case on its own particular facts and circumstances [and] considers the nature and seriousness of the dishonesty in order to assess whether it is reconcilable with sustaining the employment relationship.” In the second decision, the SCC addressed administrative (to be contrasted with disciplinary) suspensions. Typically, an administrative suspension is issued pending the outcome of an investigation into the employee’s conduct. The SCC held that administrative suspensions are lawful, but only if the suspension is necessary to protect the employer’s legitimate business interests, there is a good faith reason for issuing the suspension and, in general, if the employee is suspended with pay (Cabiakman v. Industrial Alliance Life Insurance Co., 2004).
Accordingly, even prior to Bhasin, the SCC was moving toward a greater measure of mutuality regarding good faith obligations in an employment relationship. However, notwithstanding the court’s attempt to at least partially rebalance the scales, for the most part, good faith in an employment contract was largely a one-way affair with the obligations running from employee to employer. The question I will examine in this article is whether Bhasin has been used as a springboard to impose further good faith obligations on employers. In the next section, I review the Bhasin decision in greater detail.
THE BHASIN DECISION
Bhasin was not a dispute under an employment contract; rather, the contract in question took the form of an exclusive distribution agreement. Heritage Education Funds Inc. (“Heritage”) marketed education savings plans using a network of independent dealers known as “enrollment directors”
including Mr. Bhasin who operated a successful business that employed several sales representatives. The contract between Heritage and Bhasin, somewhat akin to a franchise agreement, was for a 3-year term and included an automatic renewal clause, subject to either party providing 6-months’ notice of termination.
Mr. Hrynew was another enrollment director (he operated the largest agency in Alberta) and a direct competitor of Bhasin. There was some animosity between them and Hrynew coveted Bhasin’s business. Hrynew made several offers to buy Bhasin’s agency and, when rebuffed, made entreaties to Heritage to force a “merger” (in effect, a hostile takeover) between the two firms. In 1999, the Alberta Securities Commission required Heritage to appoint an individual to monitor all enrollment directors to ensure compliance with Alberta’s securities legislation. Heritage appointed Hrynew and Bhasin objected to Hrynew having access to his confidential business records. Unbeknownst to Bhasin, Heritage intended to force a merger, and when Bhasin persistently refused to allow Mr. Hrynew to audit his records, Heritage at first threatened to terminate Bhasin’s agreement, and later gave notice of non-renewal. Most of Bhasin’s sales team continued on with Hrynew and Bhasin commenced a new relationship with a Heritage competitor on a much less profitable footing. Bhasin sued both Heritage and Hrynew alleging, respectively, breach of contract and inducing breach of contract.
The SCC held that Hrynew was not liable for inducing breach or for conspiracy to injure since, on the evidence, he did not encourage Heritage to act dishonestly in its dealings with Bhasin. However, the SCC also held that Heritage was dishonest in its dealings with Bhasin – particularly regarding its exercise of the non-renewal provision – and thus Heritage was liable for damages based on Bhasin’s business losses. These damages were assessed based on the fair market value of Bhasin’s business when the agreement was terminated (fixed at $87,000).
The critical aspect of the Bhasin decision concerns the SCC’s discussion of parties’ “good faith”
obligations in commercial contracts:
…it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.
The SCC posited that “commercial parties expect a basic level of honesty and good faith in contractual dealings especially in longer term relational contracts.” While stressing that good faith was an
“organizing principle”, the court also cautioned that it stood on a much lower plane than fiduciary obligations (which, in turn, impose an obligation on the fiduciary to act in the best interests of the subordinate party). Contracting parties are expected to have “appropriate regard” for each other’s legitimate contractual interests. The SCC observed that the principle would “have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange” and this observation particularly resonates in the case of employment contracts. The court observed that the good faith organizing principle did not establish a new free-standing duty of loyalty but, as discussed above, in employment relationships, the employee’s duty of loyalty has long been an essential aspect of the agreement. The critical issue is whether this new “organizing principle” will lead to new good faith obligations for employers.
GOOD FAITH AND EMPLOYMENT CONTRACTS POST-BHASIN
Lower courts have used Bhasin as a springboard to expand employers’ obligations in all phases of the employment relationship from hiring, to termination, to even the post-termination period. I will address each particular phase in turn.
Employers’ Pre-Hire Good Faith Obligations
Prior to Bhasin, employers were bound by a duty of honesty regarding pre-hire representations made to prospective employees. Thus, for example, an employer who misled a prospective employee about the nature of the employment opportunity being offered (particularly regarding the permanency of the position) was ordered to pay damages for negligent misrepresentation (Queen v. Cognos Inc., 1993).
However, the doctrine of negligent misrepresentation does not create affirmative disclosure obligations, nor does it establish a general duty of honesty – it merely establishes a duty to ensure that pre-hire representations are not made negligently (that is, carelessly or recklessly). Since Bhasin, some courts have expanded the nature of employers’ pre-hire obligations.
In Antunes v. Limen Structures Ltd. (2016) the court found that the plaintiff was induced to enter into an employment relationship with the defendant on the basis of false representations (and material non-disclosures) regarding its financial wherewithal. The court extended the notice period, citing Bhasin, based on this misstatement (the damages awarded on this account were approximately $105,000). The court awarded the plaintiff an additional $500,000 based on a pre-employment promise to issue the plaintiff a 5% shareholding in the employer, which the employer’s principal maintained had a
$10,000,000 value.
The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 13 Unlike Antunes, there were no specific pre-hire representations in Canaccord Genuity Corp. v. Pilot (2015). Two employees (securities salespersons) claimed that they were not obliged to repay loans that had been made to them from their employer. The loans, which in the ordinary course would have been fully forgiven after five years, became immediately due and payable under the express terms of the loan agreement when their employment ended due to the employer closing the branch office where they worked. The employees alleged a bad faith “misrepresentation by omission” since the employer did not tell them, when they were originally hired, that it planned to close the branch office. Although the employer initially obtained a summary judgment for the full amount of the loans, the Ontario Court of Appeal set aside the judgment and ordered a new trial where the employees’ “good faith” arguments could be fully explored. The dispute does not appear to have proceeded to trial and, presumably, was later settled.
The dispute in Ortiz v. Shokar (2018) centered on a live-in caregiver agreement entered into under the provisions of the Canadian federal government’s temporary foreign worker program. Ms. Oritz entered Canada under a temporary work permit to work for a specified individual and when her employment ended, she entered into a new employment contract with Ms. Shokar and started working for her. However, Ms. Shokar was legally obliged to obtain a new work permit for Ms. Ortiz but never did so and, as a result, Ms. Ortiz was illegally working in Canada. Nearly four months after she commenced working for Ms. Shokar, Ms. Ortiz was arrested by Canadian Border Security officers and was later subject to a removal from Canada order. Her employment with Ms. Shokar ended at this point. Ms. Ortiz eventually found new employment in Canada and she was issued a new work permit. Ms. Ortiz sued Ms.
Shokar for lost wages covering the intervening period from her arrest until she found new employment.
The court concluded that although the issuance of a valid work permit was a condition precedent to the parties’ employment contract (and it was never satisfied), Ms. Shokar was acting in bad faith when she failed to take the requisite steps to ensure that a work permit was issued. Accordingly, the court awarded Ms. Shokar the equivalent of seven months wages as damages for wrongful dismissal.
Employer Good Faith Obligations During the Employment Relationship
As previously discussed, historically, a duty of good faith and loyal service was owed by employees to employers but not vice versa. However, the courts, relying on Bhasin, have now held that employers must ensure that they interpret and apply their overtime obligations in good faith and if they fail to do, may be held liable for more than simply unpaid overtime pay; i.e., additional damages may be awarded for having acted in bad faith (Baroch v. Canada Cartage, 2015).
Employers must act in good faith when determining whether an employee has actually, and unequivocally, resigned and, most particularly, when a resignation is triggered by significant work-related stress (Newman v. Bend All Automotive Inc., 2015; Avalon Ford Sales (1996) Limited v. Evans, 2017). In Jonasson v. Nexen (2018), a long-service employee negotiated a 7-month leave of absence and signed an LOA agreement including a provision that the employer would make all reasonable efforts to return the employee to a similar position on his return. Unbeknownst to the employee, senior management had decided to eliminate his position. The employer refused to allow the employee to return from his leave and argued – as was stated in the LOA – because a suitable position was not available for him, he was deemed to have resigned. The court refused to enforce the “deemed resignation” provision in the LOA and awarded the employee both compensatory damages (based on a 23-month notice period) and $20,000 in punitive damages. With respect to the matter of “bad faith”, the court observed:
Nexen failed to act with candour and forthrightness. It permitted Mr. Jonasson to enter into a LOA Agreement at a time when it knew that a significant percentage of management positions would be cut…Nexen’s deliberate and ongoing secrecy about the intended cuts prevented Mr. Jonasson from protecting his own interests. The phrase
“reasonable efforts”, without further definition, necessarily gives rise to discretion…It exercised its discretion inconsistently with the anticipated intentions of both parties. Nexen’s lack of particularized effort may have complied with its own expectations, but could not have been within the reasonable expectations of Mr. Jonasson. Nexen attempts to hold Mr. Jonasson to his end of the agreement while failing to honour its own. In effect, Nexen exploited an agreement that was obtained through and continually characterized by a material lack of candour to deem Mr.
Jonasson’s departure a resignation, thereby evading any obligation to pay severance. Nexen acted in bad faith.
Allegations of employee misconduct frequently trigger a third party investigation; the investigator gathers the necessary facts and then delivers a summary report to management. In Correia v. Canac Kitchens (2008) an undercover investigator mistakenly identified a 62-year old long-service employee, instead of a much younger similarly-named employee, as being involved in drug dealing at the
employer’s plant. The 62-year old employee was summarily dismissed and arrested, although four months later the charges were dropped when the authorities realized their mistake. The employee’s claim against the employer for “negligent investigation” was summarily dismissed, the Ontario Court of Appeal reasoning that “the Supreme Court of Canada rejected the submission that an employer must have good faith reasons for dismissal or that there could be an independent action or head of damages for breach of such alleged duty of good faith, either in contract or in tort [and thus] to recognize a tort of negligent investigation for an employer would be inconsistent with the holding in Wallace.”
However, employers can now be held liable, consistent with the “good faith” principle enunciated in Bhasin, for failing to conduct a proper investigation. For example, in Bray v. Canadian College of Massage and Hydrotherapy (2015), a post-Bhasin decision, the employee was dismissed and by way of defence, the employer maintained the employee had been dishonest. This assertion was based on a complaint that had apparently been lodged against, but never drawn to the attention of, the employee. The court rejected the just cause defence and, in addition, awarded the employee $5,000 in punitive damages based on its demonstrated bad faith: “I find that the subject-matter of the complaint could not reasonably have been viewed by the employer as proved or true facts [sic] based on the information then within its possession [and] that the failure to disclose this matter to Ms. Bray, involving as it did a question of her honesty, and failing to give her an opportunity to respond, was a violation of the duty of good faith performance of a contract”. In essence, the court awarded the employee damages flowing from its failure to conduct a proper investigation into the employee’s alleged misconduct – the very sort of award that the Ontario Court of Appeal stated did not lie, as a matter of law, in Correia (a pre-Bhasin decision); see also Joshi v. National Bank of Canada (2016).
As previously discussed, in Cabiakman (2004) the SCC held that an employer may impose an administrative suspension, provided there is a proper justification for suspending the employee, the suspension is with pay, and the employer is acting in good faith. The principal concern with an administrative suspension is that, at some point, a lawful suspension may morph into an unlawful deemed termination (known as a “constructive dismissal”). In Potter v. New Brunswick Legal Aid Services Commission (2015), and applying Bhasin, the SCC added additional criteria regarding lawful administrative suspensions. First, the employee must be informed why he or she is being suspended.
Second, if the suspension is not based on a legitimate business reason, a finding of constructive dismissal
“is inevitable”. Third, administrative suspensions should be for a defined period – indefinite suspensions raise the spectre of a constructive dismissal. Fourth, the court rejected the notion that employers generally
The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 15 have the legal right to place employees on what has sometimes been termed “garden leave” – that is, prohibiting the employee from reporting to work while still paying the employee his or her regular wages:
“…no employer is at liberty to withhold work from an employee either in bad faith or without justification”.
Good Faith Obligations at Termination of Employment & During the Post-Termination Period It is axiomatic that an employer must have just cause for dismissal if it is to avoid having to either give notice or pay severance pay. This legal doctrine creates an economic incentive for employers to allege cause – in some cases, the allegation may be made in good faith; in other cases, it may be used as leverage to negotiate a more favourable settlement. In Karmel v. Calgary Jewish Academy (2015), the court concluded that the employer acted in bad faith by “papering a path” over a period of about 18 months to create an illusion of just cause where none existed. The court found the employer alleged cause to avoid paying out the 3 ½ year balance of the employee’s fixed-term employment contract. Thus, in addition to severance pay, the court awarded the wrongfully dismissed employee an additional $200,000 for the damage to the employee’s reputation and his mental health.
Employers must not engage in bad faith conduct in order to defeat an employee’s contractual entitlement to benefits. In Fioravanti v. OLG (2018), the employee’s retirement agreement obliged him to identify and train a successor as a condition of receiving certain post-retirement benefits. The employer argued that the employee failed to satisfy this obligation and, as such, refused to pay him any monies otherwise due under the retirement agreement. However, notwithstanding the employee’s failure to comply with the “hire successor” provision, the court awarded him the post-retirement benefits because the failure was traceable to the employer’s bad faith – specifically, the employer was the “author of its own misfortune in terms of not allowing [the retiring employee] adequate time to train [a possible successor].” Salager v. Dye & Durham Corporation (2018) is a case in a similar vein. The employer dismissed the employee (its CEO) allegedly for cause, and when the employee sued for wrongful dismissal, the parties settled the dispute. One of the terms of the settlement agreement obliged the employer to make certain payments and provide certain documents regarding the employee’s income tax liability. The court found that the employer made “no efforts” to comply with this provision. The court held as follows: “[The employer] made no efforts until the very last moment to comply with Clause 14 [and] disregarded their contractual obligation to use their best efforts to cooperate with [the employee’s]
VDP application and then refused to pay his tax arrears when they knew, and admitted, that amounts were owing to the CRA on his behalf. In my view, aggravated damages must flow from this breach of the duty of good faith and I award the [employee] $25,000 in aggravated damages for this breach.” The court also awarded a further $50,000 in punitive damages flowing from the same contractual breach.
Perhaps the current high water mark for damages for bad faith is the $750,000 awarded to the plaintiff in Galea v. Wal-Mart Canada Corp. (2017). This sum, ordered in addition to nearly $900,000 in severance pay, flowed from the employee’s wrongful demotion, the employer’s refusal to be honest and straight-forward with the employee regarding her future prospects with the company prior to termination, the employer’s post-termination conduct including its failure to pay contractually-mandated post- employment insurance benefits, and its misconduct during the litigation.
Matthews v. Ocean Nutrition Canada Ltd. (2018) will afford the SCC a further opportunity to clarify the extent of employers’ good faith obligations in light of Bhasin. Matthews concerns a constructively dismissed employee’s entitlement to certain benefits under a long-term incentive plan (the
“LTIP”). The LTIP expressly provided that benefits were not payable to individuals no longer employed
“regardless of whether the Employee resigns or is terminated, with or without cause”. Mr. Matthews resigned his employment and, as determined by the trial judge, this resignation was prompted by one particular executive who “engaged in a course of conduct aimed at pushing Matthews out of operations and minimizing his influence and participation in the company”. The notice period was fixed at 15- months and since Matthews’ entitlement to LTIP benefits would have crystallized during the notice period had he still been employed at the point of crystallization, the trial judge awarded Matthews the nearly $1.1 million due under the LTIP. This award was set aside by the appellate court in a 2-1 decision.
The majority simply relied on the clear and unequivocal wording of the LTIP agreement: “The hearing judge’s finding…flies in the face of the very clear and unambiguous wording of the Agreement. Whether Mr. Matthews resigned, or was dismissed without cause, once his employment terminated, any right he had to recover under the Long Term Incentive Plan ceased” (see also Styles v. Alberta Investment Management Corporation, 2017, a very similar case on the facts, to like effect). By contrast, the dissenting judge, in a colorful and caustic judgment that relied heavily on Bhasin, implied a term into the LTIP in order to provide an avenue for redress:
A dismissal for the sole purpose of avoiding the payment of the LTIP would be contrary to an implied duty of good faith. The lies and deception employed by Emond, a person who was both an employee and director of Ocean, in his crusade against Matthews is no less offensive and contrary to an implied duty of good faith vis-à-vis both the LTIP and the employment contract…There is nothing in the LTIP or the employment contract that implicitly allows Ocean to terminate Matthews based on lies and deception. The common law duty of honesty is implicit in both the LTIP and the employment contract. In spite of the terms of the LTIP, in the unique circumstances of this case, I am satisfied that Matthews is entitled to recover full damages for his wrongful dismissal.
The parties’ written arguments in the SCC appeal extensively address Bhasin and, as such, the SCC will be required to address the scope of the “good faith” organizing principle in the context of employment relationship. The SCC is expected to hear the appeal sometime during the fall 2019 term, but a decision is not likely to be delivered for many months after the hearing.
BHASIN AND QUASI-EMPLOYMENT RELATIONSHIPS
To this point, I have focussed my attention on the impact of Bhasin in terms of the expansion of employer obligations vis-à vis employees. However, since Bhasin is a principle of general application to all types of contracts, it has also been utilized to expand the rights of dependent and independent contractors. For example, a welding quality control consultant, characterized as a dependent contractor, was entitled to damages when his client did not exercise its termination rights under the agreement when it first knew that it no longer required his services. Accordingly, the consultant was denied an opportunity (for about two months) to seek out other work, a course of action the consultant was otherwise denied from pursuing under the terms of the consulting agreement (Nexus Quality Control Services, Inc. v.
Matrix Service Canada ULC, 2016). Mohamed v. Information Systems Architects Inc. (2018) also concerned the termination of a consulting contract. The consultant’s services were to be provided to a third party client. The consultant’s contract was terminated – seemingly in accordance with the termination provision in the agreement – after the client learned that the consultant had a criminal record (dating from when he was in high school, some 15 years earlier). The consultant had disclosed his record prior to entering into the consultant agreement. The court, applying Bhasin, held that the consultant’s termination was unlawful: “…although the appellant had a facially unfettered right to terminate the contract, it had an obligation to perform the contract in good faith and therefore to exercise its right to
The Journal of Human Resource and Adult Learning, Vol. 15, Num. 1, June, 2019 issue 17 terminate the contract only in good faith… Because the [consultant] disclosed his criminal record to the appellant right at the beginning, before signing the ICA and before commencing the project with [the third party client], and complied with all the requirements of the security check, the [party engaging the consultant] reliance on the criminal record to terminate the contract one month later was not a good faith exercise of its rights under the termination clause of the ICA.” The consultant was awarded damages based on the expired term of the fixed-term agreement.
In Lightstream Telecommunications Inc. v Telecon Inc. (2018), the plaintiff – in essence a one- person company – provided fibre optic cabling installation and repair services. The defendant provided these services to large telecommunications firms through various sub-contractors, including the plaintiff.
The plaintiff’s contract with the defendant was terminated; the termination was based on an alleged theft by the plaintiff’s employee. The allegation was never substantiated and the court characterized the defendant’s investigation into it as “substandard” and based on “unreliable” evidence. The court observed:
“Telecon’s casual indifference and lack of any diligence in following up and getting to the bottom of the theft claim, one that turned out to be completely lacking in merit, breached their implicit duty of good faith towards Lightstream.” The court awarded damages for the wrongful termination of the service contract.
CONCLUDING REMARKS
To date, lower courts have used the Bhasin “good faith” principle as a springboard to enlarge the duties owed by employers to their employees. Thus, prior to Bhasin, there was a viable legal action stemming from false and misleading representations that induced an individual to accept an offer of employment. But an actual representation and detrimental reliance were (and are) critical elements of the tort of misrepresentation. Applying Bhasin, an employee (or even a contractor) can pursue an action in the absence of a representation if the employer engaged in dishonest behaviour that caused economic loss to the employee (see, for example, Baier, 2019). Prior to Bhasin, the SCC recognized that employers were obliged to act in good faith regarding the manner of termination (Wallace v. United Grain Growers Ltd., 1997); post-Bhasin, the employer’s good faith obligation now constitutes a thread that runs throughout the entire employment relationship, spanning the period from pre-hire to post-termination. Further, the employer’s breach of its good faith obligations are now resulting in both compensatory and punitive damage awards. The Curran (2018) study, discussed above, demonstrated that average “bad faith”
damage awards for misconduct at the point of dismissal (originally recognized in Wallace, 1997) decreased following the SCC’s retrenchment in Honda v. Keays (2008). It may be that this trend will reverse course yet again as judges use Bhasin to justify damages awards based on bad faith conduct that occurs at any point in the employment relationship, and in the absence of proof of actual psychological injury or economic loss.
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