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In a unanimous decision last month, the Ontario Court of Appeal ruled that employers who allege cause and later abandon that position, or who terminate an employee while on sick leave, or who make mistakes in the termination process, should not automatically be saddled with a bad faith award.

The employee, Ms. Mulvihill, was a full time employee of the City of Ottawa. In 2004 she complained of harassment. An investigation was conducted by the City. The subsequent report canvassed all the points of alleged harassment and concluded there may have been inappropriate and unprofessional conduct, however, the incidents did not amount to harassment.

The employee was dissatisfied and e-mailed senior city officials and the mayor, in which she attacked the competence of co-workers and the credibility of the investigator. She did not return to work and did not follow the provisions in the City’s harassment policy despite being reminded of the policy that provided for the review of a complaint that has been dismissed at an initial stage.

Her e-mail and other conduct, such as refusing to return to work, was treated by the City as insubordination and she was dismissed and the employer alleged cause for the dismissal. She sued for wrongful dismissal.

Following examinations for discovery, the City requested to amend its statement of defense and withdrew the just cause defense. The employee refused but the amendment was sought and granted at the outset of trial. At that point the City paid the severance amount called for in the employee’s contract.

At trial, Wallace damages of five-and-half months were awarded by the trial judge who ruled that dismissal for cause was not warranted and the defendant dismissed the employee while she was on sick leave.

The Court of Appeal, in reviewing the entire context of the employee’s actions found that the City was dealing with a very difficult and uncooperative employee. In effect, her inappropriate actions formed some reasonable basis for the City’s initial position and therefore bad faith was not shown. The trial judge’s bad faith award was wiped out. The court stated:

The mere fact that cause is alleged, but not ultimately proven, does not automatically mean that Wallace damages are to be awarded. So long as an employer has a reasonable basis on which to believe it can dismiss an employee for cause, the employer has the right to take that position without fear that failure to succeed on the point will automatically expose it to a finding of bad faith.”

This case reminds us that provided the employer acts on an honest and reasonably held belief that the conduct gives rise to a just cause for termination, the employer should not be penalized for taking that position, but then withdrawing it at a later date, which can be for a variety of reasons, including a willingness to compromise. That willingness should not be compromised by fear of automatic liability for bad faith.

Punitive damages were denied at trial on the following bases:

  1. Other employees were frustrated and exasperated with a “difficult employee”;
  2. Mulvihill’s conduct was undermining the morale of co-workers;
  3. The City made a mistake in dismissing Mulvihill but its conduct could not be characterized as malicious, oppressive and high-handed.

The appeal court found that those same reasons supported a denial of bad faith damages and rendered the award of bad faith damages a serious error in law.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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