Keeping the faith, for now: the Supreme Court of Canada maintains the status quo on the duty of good faith, but leaves the door ajar for future claims.
As an employer in Canada, you may have received a demand letter from a dismissed employee alleging that the company has breached a ‘duty of good faith'. Generally speaking these claims don't go anywhere because the law in Canada is very clear that there is no ‘duty of good faith' that pervades the entire employment relationship. Our courts have recognized that an employer must act in good faith in the manner in which it dismisses an employee, for example by treating them with dignity, respect, and honesty. Beyond that, an employer does not have to consider an employee's best interests when making decisions about their employment, for example, around incentive compensation, or position changes, or restructuring. That being said, the law on this area is constantly developing and it is not hard to imagine a duty of good faith being imposed into employment relationships for employers and employees.
This past fall, the Supreme Court of Canada (“SCC”) released a much anticipated decision dealing with a number of important employment law issues: Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (“Matthews”). Primarily, the SCC addressed a dismissed employee's entitlement to damages for lost incentive compensation during their reasonable notice period. Much has been written about this topic since this decision was published. However, also importantly, the SCC addressed the concept of good faith and fair dealing by an employer during the employment relationship and at its end. Thankfully for employers throughout Canada, the SCC did not expand the law on this important issue.
The brief facts of this case are as follows: Mr. Matthews worked for Ocean Nutrition Canada Ltd. (“Ocean”) in various senior executive roles over a period of 14 years. The employment relationship between Ocean and Mr. Matthews soured after Ocean hired a new Chief Operating Officer. The new COO removed responsibilities and reports from Mr. Matthews and undermined him over a period of years. In particular, Mr. Matthews' title and reporting relationship were changed, his work and responsibilities were reduced and there was a “campaign” to marginalize him within Ocean.
Eventually Mr. Matthews concluded that he had been constructively dismissed, and quit his job. About 13 months later, Ocean was sold to another company and, had Mr. Matthews been employed at that time, he would have received a substantial payment (approx. $1.1.m) under Ocean's Long Term Incentive Plan (“LTIP”). As such, Mr. Matthews sued Ocean for wrongful dismissal, seeking damages for lost wages and other forms of compensation including the LTIP payment. Mr. Matthews also claimed that the constructive dismissal was carried out in bad faith and in breach of Ocean's duty of good faith. At the SCC, Mr. Matthews urged the court to recognize the duty of good faith as “animating the whole of the performance of the employment contract”; that is, to find a duty of good faith owed by employers to employees throughout the entire employment relationship, and not just at the time of dismissal. Interestingly, Mr. Matthews did not seek aggravated damages as a result of the alleged breach of the duty of good faith, but rather he argued that this breach entitled him to the LTIP payment.
The trial judge found that Mr. Matthews was constructively dismissed and awarded him a fifteen (15) month notice period, which covered the time of Ocean's sale. The trial judge awarded Mr. Matthews lost wages and compensation for this 15 month period, including the value of the LTIP payment. The SCC confirmed this aspect of the trial judge's decision, finding that the LTIP documentation was not adequately drafted to disentitle Mr. Matthews to the LTIP payment during his reasonable notice period. Therefore the SCC did not need to determine whether Ocean had acted in bad faith sufficient to entitle Mr. Matthews to the LTIP payment, because he was awarded this as part of his damages for his wrongful dismissal.
On the issue of good faith, the SCC did offer some guidance on the existing state of the law in the interests of assisting employers and employees in understanding what their rights and obligations are.
Importantly, the SCC confirmed that the duty of an employer to act in good faith in the manner in of dismissal is distinct from the obligation to provide reasonable notice. That is, an employer can fail to provide reasonable notice but this does not necessarily lead to the conclusion that the employer acted in bad faith.
The SCC did not take Mr. Matthews up on his call to expand the duty of good faith to the entire employment relationship, and instead confined its comments to explaining what it said was already “settled law”. The first of these settled principles is that parties to an employment contract have a duty of honest performance, which simply means that the parties must not lie to, or knowingly mislead, the other on issues that are directly linked to the performance of the employment contract. The second of these settled principles is that when an employee alleges a breach of the duty of good faith in the manner of dismissal, a court is able to examine a period of conduct that is not confined to the exact moment of termination itself. That is, the employer's conduct leading up to the termination (perhaps even for years leading up) is open for review by the courts in assessing whether the employer acted in good faith in the manner of dismissal.
If an employee can establish that their employer breached the duty of good faith in the manner of dismissal, that employee may be entitled to damages separate and apart from lost compensation over the reasonable notice period. The principles of causation (the “but for” test) will apply, so that an employee will need to establish that it was reasonably foreseeable that a breach of this duty by the employer would lead to harm to the employee, for example mental distress.
Significantly, the SCC left the door ajar for a broader duty of good faith to be recognized in the future. The following comment from Justice Kasirer makes this abundantly clear:
“[i]t might be that … a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee” (at para. 85).
Given that the SCC was not required to decide that particular issue in order to decide the appeal, it did not reach any conclusions aside from confirming what the already “settled law” is.
Lessons For Employers
Matthews was primarily a case about the need for clear and unambiguous drafting of employment agreements, including incentive compensation plans. Fortunately for employers, the duty of good faith remains confined to the manner of dismissal, meaning that an employer must treat an employee with dignity, respect and honestly, even if the dismissal is for just cause. Further, parties to an employment contract have a duty of honest performance, which simply means that the parties must not lie to or knowingly mislead the other on issues that are directly linked to the performance of the employment contract.
Mr. Matthews sought to expand this area of law and the SCC was not willing to on the facts of the case before it. Employment lawyers throughout Canada will watch carefully as new cases come forward, looking to push through the open door and arguing that an employer can be liable for breaching a duty of good faith outside of the context of termination. For now, employers can keep the faith that so long as they act appropriately in the manner of dismissal, they will be on the right side of the law.
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.