Report on Good Faith and
The Individual Contract of Employment

Executive Summary

A. Introduction

The Manitoba Law Reform Commission has conducted a comprehensive review of the common law relating to bad faith dismissal following the decision of the Supreme Court of Canada in Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701 (hereinafter referred to as Wallace).

The Commission is concerned with the remedy for bad faith dismissal created in Wallace. In the opinion of the Commission, the remedy proposed by the minority in Wallace presents a much more rational development of the common law of employment.

Employees under fixed term contracts may only be dismissed for cause; that is, a fundamental breach of the contract. Employees under indeterminate contracts of employment, however, may, in addition, be dismissed for any reason as long as the employer gives reasonable notice or equivalent salary in lieu thereof. The obligation to give notice is an implied term of the employment contract, the breach of which may give rise to an action for damages for wrongful dismissal.

In both fixed and indeterminate term contracts the dismissal process may be complicated by the employer's failure to handle it in an honest, forthright and sensitive manner. This is called bad faith dismissal and it adds significantly to the trauma and stress of losing one's job. The bad faith does not relate to the reasons for dismissal but rather to the manner of dismissal.

B. The Law of Bad Faith Dismissal in Manitoba

Prior to Wallace, Canadian courts struggled with the appropriate legal response to claims for bad faith dismissal. Traditionally, an employee was entitled to compensatory damages for the failure to give reasonable notice but there was no remedy for non-pecuniary loss (such as mental distress or loss of reputation) flowing from bad faith conduct unless that conduct was sufficient to establish a cause of action on its own (for example, defamation).

Despite this "rule", Canadian courts found a number of ways to compensate employees and/or punish employers for bad faith. This resulted in an inconsistent body of case law. In Wallace, the Supreme Court sought to address the uncertainty and unpredictability in the law and strike a balance between protecting employees from bad faith conduct and maintaining employers' freedom to manage their workforce.

The Supreme Court affirmed the employer's right to dismiss an employee for any reason as long as reasonable notice is given, but went on to say that the employer must exercise the power to dismiss in good faith. This means that the employer must act in a candid, reasonable, honest and forthright manner and should refrain from conduct which is unfair, misleading and unduly insensitive. The Court's remedy was to extend the period of reasonable notice beyond that which would have been awarded in the absence of bad faith conduct.

Justice McLachlin (as she then was), speaking for the minority in Wallace, disagreed with the majority's remedy, preferring to treat the obligation to act in good faith at termination as an implied term of the employment contract, the breach of which gives rise to an action for damages. The amount of damages should then be based upon the actual loss suffered by the employee as a result of the conduct.

The duty to act in good faith articulated in Wallace has been well received but the remedy of extended notice has been criticized on a number of grounds. The purpose of reasonable notice is to give the dismissed employee financial support while they find new work. The amount of notice will depend on factors related to the employee's ability to find new work and bears little relation to any loss suffered due to bad faith conduct.

As the remedy does not address the extent of employees' actual loss, it may under-compensate or over-compensate them. The employees' monthly income is not an appropriate benchmark to compensate bad faith dismissal because neither their loss nor the need for deterrence is related to their level of income. Furthermore, high earners will receive more compensation than low earners, regardless of whether they suffer greater loss.

C. Options for Reform and Recommendations

The Commission accepts, as a starting principle, that the employment relationship plays a vital role in the health and wellbeing of employees, employers and society as a whole. The Commission acknowledges that employers need freedom to manage their workplace in order to compete but also recognizes the inherent imbalance of power in favour of employers and the fact that an employer's bad faith conduct may have serious negative consequences for employees.

The ten recommendations contained in the report are premised on the Commission's belief that the law should reflect the standards of conduct of responsible, reasonable and fair employers and the reasonable expectations of honest employees.

In arriving at its recommendations, the Commission considered the power of employers to dismiss employees without good reason and the conduct of the employer in the performance and termination of the employment contract.

Restricting or removing the right to dismiss for any reason would significantly increase the protection of employees' rights but may have a serious impact on the ability of employers to manage their workforce and their ability to compete in a global economy. The Commission did not have sufficient information and expert analysis to determine the consequences of such a radical change in the law. Accordingly, the Commission does not recommend any change in the traditional power of employers under indeterminate contracts of employment to dismiss employees for any reason, subject to reasonable notice or equivalent salary in lieu thereof and subject to good faith conduct in the termination process. (Recommendation 1)

In considering the employer's conduct in the performance and termination of the employment contract, the Commission prefers the opinion of the minority in Wallace who considered the obligation to act in good faith in the termination of an individual contract of employment to be an implied term of that contract. A breach of the implied term would give rise to a cause of action for damages to be determined by the actual loss suffered by the employee.

The Commission would go further by extending the scope of the duty to include good faith in the performance of the employment contract as well as in the termination of it. Employees are inherently vulnerable to the bad faith conduct of their employer throughout the contract, not just at termination. It may be that more harm is caused by bad faith conduct during performance of the contract than at termination. Restricting the scope of the duty does not make sense if the purpose of the duty is to protect employees from harm.

The concept of a broader duty of good faith in the employment context is increasingly recognized both at common law (for example in constructive dismissal law) and in legislation (The Labour Relations Act and The Human Rights Code). The concept of an implied term of good faith in the employment contract is therefore consistent with previous authorities and would facilitate a rational and consistent development of employment law. It enhances certainty and predictability.

An obligation to act in good faith will not significantly interfere with the efficiency concerns of employers but will offer significant protection to employees. Furthermore, it will reduce the disparity in treatment between non-unionized workers and unionized workers who are protected from bad faith conduct by a legislatively implied term in each collective agreement in Manitoba.

For these reasons, the Commission recommends that individual contracts of employment be subject to an implied term that the employer act in good faith in both the performance and termination of the contract. (Recommendations 2 and 6)

The duty to act in good faith should apply to both indefinite and fixed term contracts. Furthermore, there is no circumstance in which bad faith conduct should be permitted and, accordingly, the Commission recommends that the obligation to act in good faith apply notwithstanding any agreement to the contrary. In other words, employers and employees should not be able to "contract out" of the obligation of good faith. (Recommendations 3 and 7)

In considering the remedies available for breach of the implied term, the Commission is of the opinion that any remedy should recognize the employee's full loss, including both pecuniary and non-pecuniary loss. Punitive damages should also be available to punish particularly egregious conduct and to act as a deterrent. Accordingly, the Commission recommends that remedies for bad faith conduct should include compensatory, aggravated and punitive damages. (Recommendations 4 and 8)

The Commission also considered whether to ground the obligation to act in good faith in tort law rather than contract law. Tort law has more flexible remedies. However, the employment contract is the primary repository of the rights and duties of employers and it would be preferable to develop the obligation in a way consistent with other obligations. The Commission therefore does not recommend creation of a tort of bad faith dismissal. (Recommendation 5) This does not mean that employees should be limited to an action for breach of contract and the Commission recommends that they be entitled to pursue any and all remedies which they may have at law including: an action for breach of contract, an action in tort or a complaint to the Manitoba Human Rights Commission (Recommendation 9).

The common law changes very slowly and the Supreme Court is unlikely to revisit this issue in the near future. Therefore, the Commission suggests that its recommendations be incorporated into new legislation, which might be called The Employment Contracts Act. (Recommendation 10)

Report #107,
December 2001