SUPREME COURT OF CANADA DECIDES THE KEAYS V. HONDA CANADA CASE

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1 June 2008 On June 27, 2008 the Supreme Court of Canada released its decision in Keays v. Honda Canada, 1 the most anxiously awaited employment decision in recent memory. As will be seen, the Court took the occasion to clarify the approach that is to be taken when awarding damages in employment law. The method that was elaborated is principled, reasoned and has as its basis the historical jurisprudence that had, over time, been extended and altered by lower courts in its application. The Court took the occasion to pull back on the reigns and was quite critical of the some of the approach taken and findings made in the lower courts. This Alert will discuss the Keays case in some detail with a view to explaining its practical significance. Keays is not an easy decision to follow, and the subtext is as important as the main findings. SOME BACKGROUND Kevin Keays ( Keays ) commenced employment with Honda Canada Inc. ( Honda ) in 1986 working on the production line at the assembly plant in Alliston, Ontario. After approximately twenty months working on the production line Keays joined the Quality Engineering Department. Keays was selected to receive training on a new computer system, created for the implementation of newly designed components into Honda vehicles, after which he was expected to instruct his fellow employees in the department on using the system. Shortly after commencing work at Honda, Keays began experiencing absences from work as a result of health problems, which culminated in his going on a disability leave in October of Honda s business philosophy mandated a lean operation such that Keays absences required his already busy co-workers to undertake his responsibilities. While on leave Keays was diagnosed as suffering from Chronic Fatigue Syndrome ( CFS ). Keays returned to work in December of 1998, under protest from both Keays and his physician, following the termination of his benefits by Honda s long-term disability insurer. Within a month of returning to work Keays began to, once again, experience absences from work, and, in August of 1999, received a written report from Honda with respect to his absenteeism. Coaching, by way of such a written report, was the first step in Honda s progressive discipline process. Upon complaining that he was unable to live up to Honda s attendance expectations, Keays was advised of a Honda program exempting employees from attendance-related progressive discipline based on a disability. Keays physician completed the necessary form and informed Honda that Keays suffered from CFS and would probably miss about four days of work per month as a result. 1 June 27, SCC w BORDEN LADNER GERVAIS LLP

2 Honda subsequently provided some accommodation for Keays absences, but Keays was required to provide a doctor s note for each absence, a requirement not imposed on other employees with mainstream illnesses. Following six days of absence in October of 1999, Honda asked Keays to see the company doctor. When Keays later complained to his supervisors that the doctor threatened to move Keays back to the production line, the supervisors told Keays that there was no intention to move him at that time. In January and February of 2000 Keays requested that the written absenteeism report be removed from his record and that Honda reconsider the requirement that he provide a doctor s note for each absence. Keays retained counsel who wrote Honda in March of that year both outlining Keays concerns and extending an offer to attempt to resolve their differences. Honda had an unwritten policy discouraging third parties advocating on behalf of employees. Honda did not respond to this letter and instead informed Keays on March 21st that Honda no longer accepted that he had a disability requiring him to be absent, and directed him to meet with Honda s occupational medicine specialist. Keays informed Honda that, on the advice of his lawyer, he would not meet with the occupational medicine specialist unless provided with clarification of the purpose, methodology and the parameters of the assessment. Honda, by a letter dated March 28th, refused to elaborate on the purpose of the meeting and warned Keays that if he did not meet with the doctor he would be terminated. Keays did not meet with the doctor and was dismissed. Subsequent to his dismissal, Keays suffered from posttraumatic adjustment disorder, was unable to work, and qualified for a total disability pension. At trial, Justice McIsaac criticized Honda, in pointed terms, for its treatment of Keays. Among other things, he found that Honda s direction for Keays to meet with the occupational medicine specialist was unreasonable, not made in good faith and was done to subsequently terminate Keays and avoid accommodating his disability. The trial judge determined that Keays had good reasons not to comply with the direction, and his refusal to see the doctor was not a repudiation of his contract of employment. Justice McIsaac held that Honda s reaction to Keays refusal to meet with its doctor was disproportionate. Not only did Honda not have just cause to terminate Keays, the trial judge also found that Honda had failed to fulfill its obligations to Keays under the Human Rights Code. Among other things, the court described the company s conduct as outrageous and deserving of significant denunciation. As a result, Justice McIssac awarded punitive damages in the unprecedented amount of $500,000 for wht he considered to be Honda s outrageous and high-handed conduct that amounted to discrimination and harassment in employment. He also determined that the period of reasonable notice, in the circumstances, was 15 months salary that was extended by 9 months because of the egregious bad faith displayed by Honda in the manner in which Keays employment was terminated and the medical consequences flowing therefrom. In a 2-1 decision, the Ontario Court of Appeal allowed Honda Canada s appeal with respect to the quantum of punitive damages awarded and on the issue of the cost premium awarded by the trial judge. Goudge, J.A. (dissenting) would have upheld the punitive damages award of $500,000. In disposing of Honda s argument that the trial judgment flies in the face of Seneca College of Applied Arts and Technology v. 2 BORDEN LADNER GERVAIS LLP

3 Bhadauria 2, Mr. Justice Goudge found that: I do not agree. Bhadauria determined that a civil action could not be based directly on a breach of the Ontario Human Rights Code. Indeed, in this case the respondent made just such a claim, which the trial judge dismissed, albeit reluctantly, by applying both Bhadauria and this court s recent application of that decision in Taylor v. Bank of Nova Scotia. The conduct, in the context of a claim for punitive damages, was not being advanced in support of a breach of the Code but as an independent actionable wrong and, on the evidence, an award of punitive damages was warranted. In terms of the quantum, Goudge, J.A. considered the following: The level of blameworthiness of the employer s conduct; The degree of vulnerability of the employee; The harm to the employee; and The need for deterrence. In the end, Mr. Justice Goudge would have upheld the $500,000 punitive damages award. Rosenberg, J.A. writing on behalf of himself and Feldman, J.A., agreed with Goudge, J.A. in all respects except with respect to punitive damages. The majority reduced the award from $500,000 to $100,000, in the circumstances, because the trial judge relied on findings of fact that were not supported by the evidence and because the award failed to accord with the fundamental principle of proportionality, discussed above. The Court observed that punitive damages awards are far more modest than was awarded by the trial judge even in the face of serious misconduct such as slander of the employee which were in the range of $15,000 to $50,000 and, rarely, up to $75,000. In fixing the quantum, the Court highlighted a number of guiding principles gleaned from Mr. Justice Binnie s reasons in Whiten v. Pilot Insurance Co. 3 : In considering the need for deterrence, the Court emphasized, as did Binnie, J. in Whiten, that the relative size of the corporate defendant is a factor of limited importance in determining the quantum of the award. In considering the proportionality of the award, regard must he had to the totality of all other penalties including compensatory damages imposed on the defendant. The duration of the impugned misconduct Whether the conduct towards the victim was malicious and high-handed. The need for the punitive damage award must be proportional to the advantage wrongfully gained. Specifically, a traditional function of punitive damages is to ensure that the defendant does not treat compensatory damages merely as a licence to get its way irrespective of the legal or other rights of the plaintiff. The Court significantly reduced the punitive damages award. It was with this background that the case came before the Supreme Court of Canada. 2 3 [1981] 2 S.C.R. 181 [2002] 1 S.C.R. 595 BORDEN LADNER GERVAIS LLP 3

4 KEAYS AT THE SUPREME COURT OF CANADA The Supreme Court of Canada had the opportunity to consider and clarify a number of issues including: 1. What factors can/should properly be considered in determining the period of reasonable notice of termination? 2. Is there a civil cause of action of discrimination or can a breach of human rights legislation found an actionable wrong for purposes of a claim for punitive damages? 3. Would the Court establish a more principled approach for awarding so-called Wallace 4 damages? As will be seen, the majority of the Supreme Court in Keays dealt a significant blow to employees while, at the same time, affirming a historical and principled approach to awarding damages in wrongful dismissal cases. Factors to be Considered When Determining Reasonable Notice Courts have considered a growing number of factors when determining the appropriate period of reasonable notice of termination in any given case. In expanding the list of considerations, judges have been quick to point out that this determination is more art than science and have resisted any formula based approach when deciding on the notional period of reasonable notice such as the ever-popular month per year of service rule of thumb. They have also said that the list of factors is not a closed set thus allowing for the addition of others based upon the circumstances of the case. Traditionally, when determining the period of reasonable notice, Courts have relied upon and applied the seminal case of Bardal v. Globe and Mail 5 and the four factors listed in that case: 1. the character of the employment; 2. the length of service of the employee; 3. the age of the employee; and 4. the availability of similar employment, having regard to the experience, training and qualifications of the employee. Indeed, the trial judge in Keays considered these factors when deciding that the appropriate period of reasonable notice in the circumstances was 15 months. In arriving at this number, however, the trial judge also considered Honda s flat (i.e., egalitarian) management structure as limiting the effect of Keays lower position in Honda s hierarchy; the fact that Keays had specialized training to compensate for his lack of formal education; his long service; and the lack of comparable employment in Alliston. Mr. Justice Bastarache, on behalf of the majority of the Supreme Court was critical of the trial judge s consideration of these other factors as they gave little insight into what Mr. Keays actually did. As Mr. Justice Bastarache said: It will therefore suffice to say here that Honda s management structure has no part to play in determining reasonable notice in this case. The flat management structure said nothing of Keays employment. It does not describe the responsibilities and skills of that worker, nor the character of the lost employment. The particular circumstances of the individual should be the 4 5 Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701 (1960), 24 D.L.R. (2d) BORDEN LADNER GERVAIS LLP

5 concern of the courts in determining the appropriate period of reasonable notice. Traditional presumptions about the role that managerial level plays in reasonable notice can always be rebutted by evidence. [emphasis added] The Court also held that no one Bardal factor should be given "disproportionate weight" over the others and, in the circumstances of the Keays case, the Court held that the "trial judge erred in applying one of the factors, alluding to the flat management structure, rather than examining the actual functions of Keays." In reaching this conclusion, the Court nonetheless refused to reduce the 15-month period of reasonable notice. In doing so, and despite the comment that no single Bardal factor should be given "disproportionate weight" the Supreme Court of Canada went on to consider the following: Keays was one of the first employees hired at Honda s plant; Keays spent his entire adult working life with Honda; Keays did not have any formal education; and Keays suffered from an illness which greatly incapacitated him. The Court found that "all these factors will substantially reduce his chances of re-employment" and, therefore, justified an assessment of 15 months notice. The Tort of Discrimination and Punitive Damages With respect to the issue of the independent civil cause of action of discrimination and principles applicable when awarding punitive damages, the Court looked at three issues: 1. whether a breach of human rights legislation amounted to an independent actionable wrong for the purposes of awarding punitive damages; 2. the circumstances in which punitive damages should be awarded; and 3. whether punitive damages were justified in this case. The majority of the Court affirmed its earlier decision in Bhadauria to the effect that there was no civil cause of action for discrimination contrary to human rights legislation. Instead, these remedies had to be pursued through applicable administrative agencies such as human rights tribunals or at arbitration. At the same time, the Court determined that a breach of the Code could not amount to an independent actionable wrong for the purposes of basing a claim for punitive damages. Mr. Justice Bastarache reasoned that, in Bhadauria, the Court had clearly articulated that a plaintiff is precluded from pursuing a common law remedy when human rights legislation contains a comprehensive enforcement scheme for violations of its terms. Further, the purpose of the Code is to remedy the effects of discrimination. Accordingly, if a breach to the Code was actionable in common law courts, it would encourage litigants to use the Code to punish employers who discriminate against employees, which is not a purpose the legislature intended. With respect to the second issue, Mr. Justice Bastarache explained that Courts should only resort to punitive damages in exceptional cases, where the wrongful conduct was so malicious and outrageous that they are deserving of punishment on their own. Quoting from another Supreme Court of Canada decision, Vorvis v. Insurance Corporation of British Columbia, 6 Mr. Justice Bastarache stated that conduct meriting punitive 6 [1989] 1 S.C.R BORDEN LADNER GERVAIS LLP 5

6 damages awards must be harsh, vindictive, reprehensible and malicious, as well as extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment. As with aggravated damages, the Court was unanimous in the view that there was no basis for the claim for punitive damages on the facts of this case in that these did not demonstrate such malicious or outrageous conduct which warranted an award of punitive damages. Further, even if the facts justified an award of punitive damages, the fact that Mr. Keays received compensatory damages, which in itself has a punitive element, should have been considered in determining whether punitive damages were necessary. The damage award as a whole must be considered when deciding whether a claim for punitive damages is necessary. Bastarache was of the view that there was no stereotyping or arbitrariness in the requirement that medical notes be produced to establish that absences were in fact related to the disability. He also accepted that the need to monitor absences of employees who are regularly absent from work is a bona fide work requirement. Further, the fact that Honda knew that Mr. Keays valued his employment and was dependent upon it for disability benefits did not justify an award of punitive damages. Bastarache further stated that the insurer s decision to cut off Mr. Keays LTD benefits had nothing to do with Honda and Honda could not be held responsible for this. Accordingly, the lower courts were wrong in attributing the insurer s decision to Honda and allow punitive damages on such grounds. Finally, while Honda s statement to Mr. Keays that hiring outside counsel was a mistake and would make things worse was ill-advised and unnecessarily harsh, it did not justify an award of punitive damages. Principles Applicable to Awarding Wallace Damages The Court took the occasion to, in effect, revisit Wallace-damages and, in so doing, dealt a significant blow to plaintiffs who advance these claims. The Court felt that this was necessary in light of its recent decision in Fidler v. Sun Life Assurance Co. of Canada. 7 Wallace established that the employer had an obligation not to act in bad faith towards the employee at the point of discharge. Where it was found that the employer acted in bad faith, courts in common law provinces would extend the period of notice by some amount (this is sometimes known as the Wallace bump ). In analyzing Wallace damages, the Court went back to the 1854 case of Hadley v. Baxendale 8 where it was held that damages are recoverable for a contractual breach if the damages are such as may fairly and reasonably be considered either arising naturally... from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties. The first question, then, when dealing with an employment case is: what did the parties contemplate at the time of the formation of the contract? The Court held that: 7 8 [2006] 2 S.C.R. 3 (1854), 9 Ex. 341, 156 E.R BORDEN LADNER GERVAIS LLP

7 At the time the contract was formed, there would not ordinarily be contemplation of psychological damage resulting from the dismissal since the dismissal is a clear legal possibility. The normal distress and hurt feelings resulting from dismissal are not compensable. The Court then affirmed that in the employment law context, damages resulting from the manner of dismissal will be available if they result from the circumstances described in Wallace, namely where the employer engages in conduct during the course of dismissal that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive. In other words it would have been in the contemplation of the parties at the time the contract was formed for damages to result when the circumstances described in Wallace are present. It would be both foreseeable and compensable. But how would this be compensated? Since the release of Wallace in 1997 common law judges have compensated employees for bad faith conduct of the employer through an extension of the period of reasonable notice. The Court determined that this approach was incorrect. Mr. Justice Bastarache held:.. if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages. Examples of conduct in dismissal resulting in compensable damages are attacking the employee s reputation by declarations made at the time of dismissal, misrepresentation regarding the reason for the decision, or dismissal meant to deprive the employee of a pension benefit or other right, permanent status for instance. In other words, the Court will have to come up with an actual number reflecting the damages that the employee suffered, if any, by reason of the bad faith conduct of the employer. This methodology should significantly limit the circumstances in which damages formerly known as Wallacedamages will be awarded. This is welcome as Wallace claims have, since 1997, been the hobby-horse for plaintiffs and their lawyers even when such claims had little, if any chance of success. The Court, after reviewing the major overriding and palpable errors at trial, determined that no breach had occurred in the manner of dismissal and no justification for an award of damages in that regard were necessary. Significance for Employers The impact of Keays will only be fully determined in the years ahead. However, the following implications of the award are readily apparent: 1. The Bardal factors remain the most important when determining the period of reasonable notice. Though no one factor should be given undue weight over the others, and recognizing that other factors will be considered, the emphasis here is on the particular circumstances of the employee. BORDEN LADNER GERVAIS LLP 7

8 2. Subject to the amendments to the Ontario Human Rights Code, employers should not be litigating human rights claims as many pundits feared following the release of the Court of Appeal s decision in Keays. The fact is that the Supreme Court affirmed Bhadauria to the effect that there is no tort of discrimination and, further, that a breach of human rights legislation will not amount to an independent actionable wrong for purposes of founding a claim for punitive damages. Employers can breath a sign of relief. 3. Punitive damage claims in employment law should be exceedingly rarely awarded and only in circumstances where other damages do not adequately address the wrong. 4. Wallace damages should also be rarely awarded. Though the Court acknowledged that it would be in the contemplation of the parties at the time of the formation of the employment contract that an employee would suffer damages if the employer acted in bad faith, it also emphasized that the Court was now require to fix an amount to the damages suffered rather than arbitrarily extend the notice period by some indeterminate amount. 5. The subtext of the Keays case is that employers can, and indeed should, manage absenteeism and disability issues in their workplace. An employer should not be found to have acted in a hardball or offensive manner merely because it managed the absenteeism in a proactive way. As Mr. Justice Bastarache noted I accept that the need to monitor the absences of employees who are regularly absent from work is a bona fide work requirement in light of the very nature of the employment contract and responsibility of the employer for the management of its workforce. The Keays case demonstrates that the Supreme Court of Canada is prepared to intervene and right a ship that it believes has drifted off course. The impact of this case cannot be understated and will be felt for some time as HR practitioners and the Courts come to terms with its significance and meaning. Keays certainly represents a blow to non-traditional damages claims in employment law. Michael P. Fitzgibbon Partner (416) mfitzgibbon@blgcanada.com Michelle S. Henry Associate (416) mhenry@blgcanada.com This newsletter is prepared as a service for our clients and other persons dealing with Labour and Employment issues. It is not intended to be a complete statement of the law or an opinion on any subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP. This newsletter has been sent to you courtesy of Borden Ladner Gervais LLP. We respect your privacy, and wish to point out that our privacy policy relative to newsletters may be found at If you have received this newsletter in error, or if you do not wish to receive further newsletters, you may ask to have your contact information removed from our mailing lists by phoning BLG-LAW1 or by ing subscriptions@blgcanada.com Borden Ladner Gervais LLP 8 BORDEN LADNER GERVAIS LLP Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents Calgary 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta T2P 4H2 Tel.: (403) Fax: (403) Montréal 1000 de La Gauchetière Street W. Suite 900 Montréal, Québec H3B 5H4 Tel.: (514) Fax: (514) Ottawa World Exchange Plaza 100 Queen Street Suite 1100 Ottawa, Ontario K1P 1J9 Tel.: (613) Legal Fax: (613) IP Fax: (613) Toronto Scotia Plaza, 40 King St. W. Toronto, Ontario M5H 3Y4 Tel.: (416) Fax: (416) Vancouver 1200 Waterfront Centre 200 Burrard Street P.O. Box Vancouver, British Columbia V7X 1T2 Tel.: (604) Fax: (604) Waterloo Region Waterloo City Centre 100 Regina Street South, Suite 220 Waterloo, Ontario, Canada N2J 4P9 Tel.: (519) Fax: (519) IP Fax: (519) Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership