The Supreme Court ruling released on June 27, 2008, in Keays vs. Honda overturned important parts of previous, pro-employee decisions from the trial and appeal court and breaks new ground for employers.

"The decision signals a recognition by Canada's highest court that employers have not only obligations but also rights in their relationship with their employees," said Christopher Andree, a partner at Gowling Lafleur Henderson LLP in its Waterloo Region office.

"They have the right to expect regular attendance and the right to information regarding the employee's condition when faced with chronic absences," said Antree. "They have the right to deal directly with their employees and to rely upon the advice of medical experts when assessing the medical information provided by an employee."

The Supreme Court overturned the previous award of Wallace damages, which consisted of an extension of the notice period from 15 to 24 months and a $500,000 award of punitive damages.

"The modification to when Wallace damages are awarded and the necessity for the employee to prove damages is new," said Andree. "The employers' right to information and to deal directly with its employee is not new, but certainly had become less used for fear of the previously imposed consequences should the behaviour be characterized as being in bad faith."

A history of absences

Court documents show that Honda dismissed Keays, who had worked for the company for 14 years, over problems related to chronic illness and absenteeism.

Keays was diagnosed with chronic fatigue syndrome and went on a disability leave in 1997. The insurer, London Life, determined that Keays was ready to go back to work in 1998 and declined his appeal of their decision.

Keays' return to work was sporadic. He was put in a company disability program that allowed employees to take absences as long as they could provide a doctor's note showing that the absence is related to the person's disability. However, the company found that the notes Keays provided became cryptic over time and they became concerned about his absences.

Keays was assessed, at Honda's request, by an independent physician, which prompted Keays to hire legal council over concerns that he might be terminated.

Honda met with Keays and followed up with a letter stating their concern over the absences and stipulating that he meet with a doctor who worked for the company. Keays at first agreed, but later on the advice of his lawyer said he would only comply with the request if Honda would clarify the intent of the examination.

Communication fell apart at this point and ultimately led to Keays' termination.

The legal issues

Several important issues were at stake with this appeal:

• an employee's right to compensation for distress due to termination;
• what issues should be considered by the courts when awarding punitive damages to employees how damages should be calculated;
• the employer's right to information about an employee; and
• the employer's right to communicate directly with an employee when an employee involves a lawyer.

The ruling of the original trial judge, Justice John R. McIsaac, strongly favoured the employee. He found that Honda had wrongfully terminated Keyes and had "... committed acts of discrimination, harassment and misconduct".

As a result, McIsaac awarded "Wallace damages", which have been awarded to employees when their employer is deemed to have acted in bad faith. McIssac increased the 15 months notice period to 24 months and also awarded Keays punitive damages of $500,000.

The cost premium and punitive damages were later reduced to $100,000 by the Court of Appeal.

The Supreme Court ruling

The Supreme Court panel, while upholding the initial 15 month notice period, overturned the award of aggravated and punitive damages against the employer. The ruling also reaffirmed the right of an employer to seek information about an employee who is chronically absent.

"These rights are necessary to assist employers, especially smaller employers who do not have sophisticated Human Resource systems, with one of the most significant workplace challenges which they face today, accommodating the ill or injured employee," said Andree."

Andree noted that the lower court decision caused confusion regarding what information an employer could access and what protocols an employer could follow when dealing with unsubstantiated and chronic employee absence.

Andree explained that the decision also signals a re-balancing of the rights of employers in respect of liability for termination without cause.

"An employer's right to terminate without cause by providing appropriate notice or pay in lieu of notice was re-affirmed," said Andree. "While employees will continue to be protected from bad faith conduct by an employer at the time of dismissal, it will only be situations where that bad faith conduct causes extraordinary mental distress that the employer will face additional damages beyond those assessed using the traditional factors which address the prospects for re-employment."

"Again, employers are able to make difficult workplace decisions and, provided there is no bad faith such as dishonesty, do so without fear that their conduct will subject them to significant and unpredictable costs," said Andree.

Andree explained that Wallace damages will now be likened to other "moral damages", which are only awarded if an employee can prove that they suffered real damages beyond the normal distress and hurt feelings experienced with termination and were caused by the bad faith conduct of the employer in the manner of dismissal.

"I believe the circumstances in which Wallace damages will be awarded will be significantly narrower than prior to the decision, but that the awards will be, in most cases, higher than we have seen previously," said Andree. "That is a sensible balance."

"Where an employer does act in bad faith and cause an employee extraordinary mental distress at a time of significant vulnerability, it should suffer a significant sanction. However, we believe those instances will be rare. Even more rare will be instances of the type of outrageous conduct which will lead to an award of punitive damages. This, we submit, is the proper balance. Severe consequence for severe behaviour which causes severe damage," said Andree.

Andree notes that employers can take heart that the previously perceived "pro-employee" world in which they operated is less so.

"They are still encouraged to develop systems and protocols to address workplace absences, and to manage liability on termination through written employment agreements, but the consequence of an error not made in bad faith has been lessened," said Andree. "The pendulum has swung back in the direction of employers."