Supreme Court Clarifies Whether Dishonesty Equals Cause

The Supreme Court of Canada recently released a decision that answers two questions of interest to non-unionized employers:

1. When will dishonest conduct by an employee justify termination for just cause?
2. How is the notice period affected where an employer has breached its duty of good faith and fair dealing?

Mr. McKinlay worked as a Controller for BC Tel for 17 years. His employment was terminated at age 48 while he was on a leave of absence for medical reasons. Mr. McKinlay alleged that BC Tel refused to provide suitable alternative work, his termination was without just cause, and BC Tel had breached its duty of good faith and fair dealing in the manner of his termination. BC Tel argued that Mr. McKinlay was aware of alternative treatment methods which would allow him to return to his old job and when Mr. McKinlay advised his supervisor that his physician had recommended a new job as the only suitable treatment, Mr. McKinlay had deliberately lied. Accordingly, BC Tel argued it had just cause to terminate Mr. McKinlay’s employment.

Mr. McKinlay was successful at trial and a jury awarded him 22 months’ notice, plus an additional 4 months’ notice due to BC Tel’s breach of its duty of good faith and fair dealing. The British Columbia Court of Appeal overturned the jury’s award on the basis that Mr. McKinlay had been dishonest with his employer and, therefore, could be summarily dismissed for just cause, irrespective of the severity or degree of dishonesty. Mr. McKinlay appealed to the Supreme Court of Canada which overturned the appeal decision and found that BC Tel did not have just cause to terminate Mr. McKinlay’s employment. The jury’s award was reinstated.

The Supreme Court of Canada concluded that an employer must examine the act of dishonesty in the context of the employee’s overall employment in order to determine whether such dishonesty amounts to just cause. It found that an absolute, unqualified rule that a single act of dishonesty entitles an employer to dismiss an employee for just cause could result in dismissals which are both unreasonable and unjust. The Court favoured an approach which "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".

The second reason this case is important to employers is because of the Court’s acceptance of the jury’s award. An award of 26 months’ notice to a middle manager is beyond the generally recognized maximum period of notice which even the most senior employee would receive.

The additional four months’ notice awarded to Mr. McKinlay was based on the application of the 1997 Wallace decision of the Supreme Court of Canada which held that the notice period can be increased where the employer has breached its duty of good faith and fair dealing in respect of the manner of the termination of employment. Many decisions which applied the "Wallace factor" adopted a two-step analysis. The first was to determine the "reasonable notice" to which the employee was entitled based upon the generally accepted factors which include age, length of service, position within the organization and the chances of finding similar suitable alternative employment. The courts would then "bump up" the notice by an indeterminate amount to compensate the employee for the breach of the employer’s duty of good faith and fair dealing. However, the Ontario Court of Appeal in Noseworthy v. Riverside Pontiac-Buick Ltd. specifically rejected this approach. It mandated that courts consider the "Wallace factor" along with all of the usual factors to determine where, within the generally accepted range, the notice for any particular employee would fall. While accepting that the top end of the range was "elastic", the Court made it clear that the approach of applying a "bump up" was unacceptable, at least in Ontario.

Of significance, the Supreme Court of Canada in this case specifically refers to an "extended notice award" and endorses the jury’s award of the extension of the notice period "by an additional 4 months to represent the damage caused by these exacerbating factors".

This recent decision serves to remind employers that there are few circumstances where they can feel comfortable in summarily dismissing an employee for dishonesty without examining all the circumstances, including the employee’s length of service and previous incidents of dishonesty. Further, should an employer fail to fulfill its obligation of good faith and fair dealing in respect of the termination, the consequences can be costly.