Damage control, Issue No. 572 at 1 (January 12, 2011)

04 Jan Damage control, Issue No. 572 at 1 (January 12, 2011)

DAMAGE CONTROL
By Nikolay Y. Chsherbinin

The deductibility of disability benefits and gross sales that dismissed employees earn during the notice period is a recurring source of uncertainty for employers, as is the awarding of moral damages arising out of wrongful dismissal. The distinction between the forms of benefits and their deductibility, and the role of moral damages, was recently revisited by the Ontario Court of Appeal in Simmons v. Webb.

John Simmons was a founder of the Simmons Group, a real estate appraisal firm. In 1991, Walter Webb joined the firm and by 1996, Webb and a recruit acquired controlling interest, rendering Simmons a non-voting shareholder. In 1997, personal problems — including arthritis that restricted his mobility and led to hip replacement surgery — began to interfere with Simmons’ professional life.

The relationship between Simmons and Webb deteriorated when a dispute arose over a client account. Tensions escalated, culminating in the termination of Simmons’ employment on Nov. 29, 2004. Webb delivered a letter of termination to the 64-year-old Simmons, which directed him to immediately remove himself and any personal items from the premises. Simmons alleged he experienced depression because of the firing, but offered no medical evidence.

Moral damages added to pay in lieu of notice

The trial judge found the manner of dismissal was insensitive, particularly given the state of Simmons’ health and his length of service. The judge also found the firm’s conduct after the termination to be “mean-spirited,” particularly Webb’s refusal to return a dictionary that held sentimental value to Simmons.

This treatment, along with Webb’s unfair denial to provide Simmons with materials he had repeatedly requested to assist his mitigation efforts, led the trial judge to award Simmons 24 months’ pay in lieu of notice, totalling $98,928 and $20,000 in moral damages.

While the award of moral damages was not appealed, the trial judge’s approach in assessing them is of interest, because it highlights the difficulty courts are having in developing consistent jurisprudence related to the method of assessing damages for conduct in the context of termination of employment.

Determining moral damages

In Keays v. Honda Canada Inc., the Supreme Court of Canada pronounced that moral damages are to be awarded if an employee “can prove that the manner of dismissal caused mental distress” manifested in the “actual damages.”

In light of the Supreme Court’s assertion, the method of assessing moral damages in Simmons is troubling for several reasons:

  1. There was no analysis that links the sum of $20,000 to any non-pecuniary loss caused by the manner of termination.
  2. There was “no medical evidence…called to substantiate” Simmons’ depression after the termination or the “impact that it had on his daily life.”
  3. There was, however, evidence Simmons immediately “took active steps to start up a new business.”

Given that Keays mandates an employee to prove the manner of dismissal caused him mental distress, the employee must prove:

  1. Not only an employer’s reprehensible conduct in the manner of termination, but also any psychological injury is related to the manner in which the employee was treated at termination.
  2. The manner of dismissal and associated mental distress caused “actual damages.” “Damage” and “damages” differ, of course: The former is a form of an injury (such as mental distress), while the latter is a sum of money paid in compensation for that injury.

Because Simmons did not seek any medical attention or professional assistance, moral damages arguably should not have been awarded due to lack of proof of mental distress, as required by Keays. The Ontario Court of Appeal’s decision in Brien v. Niagara Motors Ltd. affirms this line of reasoning, while Slepenkova v. Ivanov disputes it.

At their core, moral damages are compensatory, designed not to penalize an employer for its conduct, but to compensate an employee for breached contractual rights. The employer’s conduct is not the nub of liability for moral damages, but rather a means giving rise to the employee’s compensation should she be able to prove the manner of dismissal, and not dismissal itself, caused her mental distress. Keays’ pronouncement that “the normal distress and hurt feelings resulting from dismissal are not compensable” raises a vexing question: How does one, as a practical matter, prove mental distress was caused by the manner of and not dismissal itself? Until such time that judicial consistency regarding the form of evidence required to prove mental distress for moral damages is achieved, employers are justified in demanding employees provide evidence, medical or physical, corroborating their psychological injury and “actual damages” suffered.

Strict limits on deductions to damages

The Ontario Court of Appeal had to deal with two issues, both of which related to the quantification of wrongful dismissal damages awarded at trial.

First, the employer argued disability benefit payments Simmons received during the 24-month notice period should have been deducted. The court disagreed, stating that according to the termination letter, disability insurance benefits were halted immediately. Relying on the available “circumstantial evidence,” the court found Simmons received the disability insurance benefits from a private insurance provider, which he obtained and paid for. In support of its position, the court cited the Supreme Court of Canada decision Sylvester v. British Columbia.

Sylvester determined that disability benefits paid to disabled employees during the reasonable notice period are deductible from damages, provided they are paid solely by employers. Notably, disability benefits should not be considered contracts which are distinct from an employment contract, but rather integral components of it. In Simmons, the court was unable to conclude the parties did not intend for Simmons to receive both disability benefits and damages for wrongful dismissal. This reminds employers that in order to successfully deduct disability benefit payments from wrongful dismissal damages, two conditions must be met: Disability benefits must be paid for solely by employers and an employment contract must make it clear the parties intended for disability benefits to be deducted from severance.

Secondly, the company argued the gross sales generated by Simmons in his new business should similarly have been deducted from damages for wrongful dismissal. In many instances, starting a business is a perfectly acceptable form of mitigating damages. GivenPCL Construction Management Inc. v. Holmes Simmons’ precarious state of health, starting a business appeared to be the only realistic option for him.

In PCL Construction Management Inc. v. Holmes, the Alberta Court of Appeal found profits made by a corporation set up by the dismissed employee which are earned during the notice period may be properly deducted. In Simmons, the employer acknowledged, but did not challenge, the legitimacy of a series of expenses listed in the relevant financial statement for Simmons’ business, which substantially reduced the gross sales he realized during the notice period. Similarly, it neither attacked the net income figures set out in those statements nor argued the distinction between gross sales and net income.

Simmons serves as a useful reminder that failure by an employer to lead evidence to show that an employee’s business generated income within the notice period may result in a disallowance of a claim for deductibility of that income from damages for wrongful dismissal.

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