In Wallace v. United Grain Growers,  3 S.C.R. 701, the majority of the Supreme Court of Canada established that employers may not act in bad faith when they dismiss employees. The Supreme Court decided that this bad faith would not be a tort or an implied term in the contract of employment; rather, bad faith conduct in the manner of dismissal should be compensated by increasing the length of the employee's notice period. This decision by the Supreme Court has led to some confusion over the application of that rule in difficult cases. One such "hard case" that I will address in this article is where an employee’s notice period is limited to statutory minimums. In such a case, may a court add Wallacedamages to a notice period determined by statute?
There is no definitive answer to this question yet. The issue has yet to be addressed by an appellate level court, and there are contradictory trial court decisions on this point.
What Wallace actually said
Everybody understands the gist of what Wallace stands for: employees who are dismissed in a manner that indicates bad faith on the part of the employer ought to receive a longer notice period. Since most wrongful dismissal actions involve employees who are entitled to reasonable notice, bad faith conduct in the manner of dismissal has been treated as another factor that increases the length of an employee's reasonable notice period. The Supreme Court did not directly determine whether employees are entitled to longer notice periods in cases where employees are not eligible for "reasonable notice" (either because they have a fixed-term contract, a notice period specified in their contract of employment, or because their notice period is specified in statute).
However, the Supreme Court did not rule out such a possibility. The precise wording of their characterization of the damage awarded is that "bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period." Not "reasonable notice", but "notice." So does that mean that all notice periods (whether "reasonable" notice or determined in some other way) may be increased by Wallace damages?
Two cases that awarded Wallace damages
On two occasions, courts have awarded Wallace damages for bad faith conduct by an employer when the employee was contractually limited to the notice periods set out in provincial employment standards statutes. In Duprey v. Seanix Technology (Canada) Inc.,  B.C.J. No. 2118 and Smith v. Casino Rama Services Inc.,  O.J. No. 3098, the British Columbia and Ontario Superior Courts decided that an employee who had contracted to receive the minimum notice period prescribed by statute was also eligible to receive additional notice on Wallace grounds. In Duprey, a sales manager's contract prescribed that he would only receive the minimum required by British Columbia's Employment Standards Act – one week. The employer argued that even if terminating the plaintiff solely to avoid paying him commissions was acting in bad faith, the notice period remained as the parties contracted for. The court disagreed and added to the notice period a further period of one month. The court relied upon the general statements in Wallace concerning the need for good faith on the part of employers when dismissing an employee and also upon the fact that the employer’s conduct was "worthy of sanction."
In Smith, the employee's contract also limited her notice period to the minimum required by the Ontario Employment Standards Act. The court concluded that the employer "rushed to judgment" when it dismissed her and consequently acted in bad faith. Notwithstanding the contractual notice period, the court awarded two-and-a-half months of notice for Wallace damages (in addition to the two weeks prescribed by the Employment Standards Act).
One case refusing to award Wallace
In one recent decision, the British Columbia Supreme Court has refused to award Wallace damages where an employee's notice period is capped by statute. In Jalan v. Institute of Indigenous Government,  B.C.J. No. 929, the plaintiff was the dean of Academic Affairs of the Institute of Indigenous Government. She was governed by the terms of the Public Sector Employers Act, which set a cap of 18 months as the "maximum notice period that an employee may be given." She argued that the 18-month cap did not include Wallace damages, but the court disagreed, stating that "Wallace award serves to extend the period of reasonable notice," and thus the effect of the Act was to limit the total notice period – including Wallace award – to a maximum of 18 months.
This decision is difficult to reconcile with the Duprey or Smith decisions discussed earlier. The respective employment standards acts used the same language as the B.C. Public Sector Employers Act, referring to "notice" and not "reasonable notice." In my view, the Duprey and Smith cases better reflect the purpose of Wallace damages — to compensate employees for bad faith behaviour by their employers at a time when they are particularly vulnerable to such behaviour.
It may be possible to distinguish Jalan, however, because the notice periods in Duprey and Smith were contractual notice periods instead of statutory periods. The courts are probably more reluctant to deny Wallace damages on contractual grounds than statutory grounds. Considering that Wallace damages are meant in part to rectify the power imbalance inherent in the employment relationship, it makes little sense to deny Wallace damages on the ground that an employee "agreed" to limit his or her notice period. If the legislature limits a notice period, that is more acceptable than an employer forcing an employee into a notice period that is less than reasonable. Perhaps what Jalan means is that Wallace damages would be available when the notice period is set by contract, but not purely by statute. This would be a reasonable interpretation of Wallace.
In any event, this issue is still unresolved and will probably remain so until an appellate court determines whether Wallace damages are available when there is a notice period fixed by either contract or statute.
Chris Rootham is an associate with Nelligan O'Brien Payne LLP, practising labour employment law.
[This article is reprinted with permission and first appeared in the July 2005 issue of The Lawyers Weekly.]