Canada: Key Issues in Canadian Employment Law

Last Updated: September 21 2005
Article by Malcolm MacKillop and Christina Hall

Originally published in July 2005

American businesses continue to expand north of the border, with the result that many American companies now have employees working in Canada. While the strong political, economic and cultural ties that bind Canada and the United States permit American companies to draw on their domestic business strategy when operating in Canada, the same cannot necessarily be said about American legal strategy. This is particularly true in the area of employment law. Many American companies are surprised to learn of the statutory and common law protections that are afforded to employees under the Canadian legal system.

This article serves to summarize two important cases decided by the Supreme Court of Canada in recent years that have dramatically affected Canadian employment law. These decisions will be of interest to American companies operating in Canada as they continue to manage their employment relationships north of the border.

Employee Misconduct

It has been well established in Canadian law that an employer is entitled to summarily dismiss an employee if the employer has just cause to do so. Traditionally, a single incident of serious misconduct was often sufficient to justify terminating an employee without cause. However, over the last two decades courts have moved away from this principle and have sought an approach that recognizes and corrects the power balance that exists between employers and their employees. The 2001 decision of the Supreme Court of Canada in McKinley v. BC Tel 1 represents one of the most recent, and perhaps the most dramatic, manifestations of this policy.

In this case, Martin McKinley had taken a leave of absence from work due to heart problems after 16 years of service. He expressed an interest in returning to a less stressful position, but BC Tel never offered him alternative employment. Instead, BC Tel eventually terminated him and Mr. McKinley sued for wrongful dismissal. Initially, BC Tel resisted Mr. McKinley's claim by saying that it had offered him a reasonable compensation package and that it had used its best efforts to locate an alternative position for him. However, once the trial began, BC Tel discovered a letter from Mr. McKinley’s physician, which stated that he could have returned to his former position at BC Tel if he had taken a certain medication. BC Tel then took the position that Mr. McKinley had lied about his medical condition and the treatments available for it. It alleged that this dishonesty was sufficient for just cause for termination. Mr. McKinley denied the allegations of dishonesty. Thus, the issue before the Supreme Court of Canada was whether the alleged dishonesty was of a degree that undermined the employment relationship.

The Supreme Court of Canada reviewed two historic lines of cases in Canada: one which held that the circumstances of dishonesty must be considered in order to determine whether cause existed, and another which seemed to indicate that any degree of dishonesty constituted cause for dismissal. Ultimately, the court found the first line of cases to be more persuasive. It concluded that the proper approach was to recognize that only some forms of dishonesty would justify dismissal without notice. It held that the specific form of dishonesty had to be considered in each case: "specifically, the test is whether the employee’s dishonesty gave rise to a breakdown in the employment relationship"2. This has since been referred to in Canada as the ‘contextual approach’.

The contextual approach involves a two-step process. The first step is a determination of whether the evidence establishes the employee’s dishonest conduct on a balance of probabilities. If so, the second step is a determination of whether the nature and degree of the dishonesty warrants summary dismissal. This second step involves evaluating the surrounding circumstances of the misconduct, its level of seriousness, and the extent to which it detrimentally affected the employment relationship.

The impact of McKinley on wrongful dismissal jurisprudence in Canada cannot be underestimated. Not only has it changed the way that courts deal with employees accused of dishonesty, the contextual approach it created has now been applied to virtually all other forms of employee misconduct; including insolence, insubordination, poor performance and even sexual harassment.

Bad Faith Dismissal

There is no actionable tort for bad faith dismissal in Canada. However, in the 1997 case of Wallace v. United Grain Growers Limited, 3the Supreme Court of Canada recognized a remedy for employees who were dismissed in bad faith by introducing a new doctrine - that of the ‘bad faith discharge’.

In this case, Jack Wallace left a secure job of 25 years with one of United Grain Grower’s ("UGG") competitors, based on assurances by UGG that he would work with the company until his retirement, as long as he performed as expected. Mr. Wallace did indeed perform well, and he was consistently the top salesperson at UGG. However, 14 years later, when Mr. Wallace was in his late 50s, he was summarily discharged by UGG without explanation. When Mr. Wallace retained counsel, UGG alleged that it had cause to terminate him and it maintained that allegation until the eve of trial. This allegation made it very difficult for Mr. Wallace to secure alternate employment. He declared bankruptcy and suffered from depression.

The Supreme Court of Canada ultimately held that employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal so as not to exacerbate the negative effects of termination. On behalf of the majority of the court, Justice Iacobucci stated that:

The obligation of good faith and fair dealing is incapable of precise definition. However, at a minimum, I believe that 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.4

The court went on to state that an employer who engaged in bad faith conduct or unfair dealing in the course of terminating an employee would be subject to an increased notice period. However, the court did not set any specific parameters on such an increased notice period. Rather, it commented that it would be for the trial judge to examine in each case, the nature of the bad faith conduct and its impact in the individual circumstances. In the case of Mr. Wallace, the Supreme Court of Canada restored the trial judge's initial decision and awarded 24 months’ notice to Mr. Wallace.

Since the Wallace case, these increased notice awards have become known as ‘Wallace damages'. Courts have subsequently elaborated upon the context of the obligation of good faith and applied it to various types of employer behaviour. For example, courts have considered how this obligation relates to an employer's actions during a termination interview, when drafting a termination letter, and when structuring a settlement offer. Examples of conduct that has attracted Wallace damages includes: conveying notice of termination in a fashion designed to humiliate or punish the employee, dismissing a disabled employee without attempting to accommodate his or her disability, refusing to provide information or documentation necessary for the employee to apply for employment insurance benefits, and lying to the employee about the reasons for dismissal and/or deliberately sullying his or her reputation in the business community.

Another important aspect of Wallace damages is that courts have suggested there is no obligation to mitigate these damages - unlike damages arising from an employer's failure to provide an employee with reasonable notice. As a result, most plaintiff's counsel seek Wallace damages in every case.

As the law in this area continues to evolve, some trial judges have demonstrated their willingness to place more emphasis on the obligation of fair dealing than previously. However, for the most part, Wallace damages have not been awarded in the absence of bad faith or malice on the part of the employer.


1. [2001] 2 S.C.R. 161, (2001) 200 D.L.R. (4th) 385.

2. Ibid., at para. 48.

3. [1997] 3 S.C.R. 701, (1997) 152 D.L.R. (4th) 1.

4. Ibid., at para. 98

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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