Reasonable notice damages should account for vacation pay, The Law Times (June 3, 2013)

The issue of whether compensation for lost vacation pay accruing after dismissal and during the period of reasonable notice should be a component of damages for wrongful dismissal continues to vex employers, judges, and the bar. There are conflicting authorities in Ontario concerning the recovery of this head of damages. A survey of cases illustrates that an award of vacation pay doesn’t fall outside the scope of damages in lieu of reasonable notice.

In 1995 in Cronk v. Canadian General Insurance Co., the Ontario Court of Appeal decided that vacation pay within the reasonable notice period wasn’t recoverable. However, seven years earlier the same court made the opposing ruling in Oxman v. Dustbane Enterprises Ltd. Surprisingly, the Court of Appeal didn’t refer to Oxman in Cronk. On this ground, in a 1996 decision in Dunning v. Royal Bank, counsel for the plaintiff urged Justice Frances Kiteley not to follow Cronk and instead accept Oxman. Having discussed the competing authorities, Kiteley preferred to follow Cronk simply because Oxman lacked reasons for awarding vacation pay. As such, it would appear the court had confirmed Cronk as an authority on the recoverability of vacation pay during notice. However, subsequent courts didn’t heed Cronk.

In 2004, Justice Thea Herman ignored Cronk in Dubey v. CDA Industries Inc., preferring instead to follow the Ontario Court of Justice (general division)’s reasoning in Kwasnycia v. Goldcorp. Inc., a case released nine months prior to Cronk. In awarding a 57-year old foreman with 21 years of service damages based on 18 months’ notice, Herman also granted him damages for lost vacation pay. She qualified it as “a reasonable measure of what he might have expected to receive had he served out his period of notice.”

Similarly in 2009, Justice George Strathy recognized the dismissed employee’s entitlement to vacation pay during the notice period in Munoz v. Canac Kitchens.

In doing so, Strathy also preferred to follow the lead of Kwasnycia. In Kwasnycia, the judge Ferrier ably explained: “In my view, the rationale for entitlement to vacation pay can be expressed in the following way: absent cause for dismissal, an employee is entitled to reasonable notice of termination of employment. If an employee is summarily dismissed without cause, he or she is entitled to be compensated in damages measured by the salary, wages, and benefits that would have been afforded to the employee during the notice period; that is to say, while employed for the period of the notice.

“In the case of so-called ‘vacation pay,’ the plaintiff has not lost vacation pay per se; rather, he has lost, in effect, the benefit of a paid vacation. Vacation pay in the case at bar is agreed to be equivalent to 10 per cent of the plaintiff’s salary. This is the amount that the plaintiff would have been entitled to if he did not take a vacation while employed during the notice period. This figure, in my view, is the best measure of the value of the paid vacation entitlement and is the best measure of the damages suffered when the defendant deprived the plaintiff of this benefit by dismissing him summarily. Accordingly, in my view, the plaintiff’s entitlement is equivalent to two years of vacation pay at the 10 per cent rate.”

In contrast, consider the Ontario Superior Court’s 2011 decision in Plester v. Polyone Canada Inc. In this case, the company summarily dismissed a supervisor with 17 years of employment for a serious mistake at work. Having found that just cause didn’t exist, Justice Bonnie Wein awarded the dismissed employee 14 months’ salary in lieu of notice but refused to factor in compensation for lost vacation pay. In coming to her conclusion, Wein followed Lim v. Delrina (Canada) Corp., in which Justice Harry LaForme, in turn, referenced a theory advanced in an unreported case that “the employer could require the employee to take her vacation during the period of notice and therefore there should be no vacation pay entitlement added to the pay for the notice period.”

The foregoing cases illustrate that compensation for lost vacation pay during the reasonable notice period is recoverable in Ontario. The modern jurisprudence has overshadowed Cronk and rendered it a remnant of an abandoned principle. This proposition finds support in a very recent case, Plester, in which Wein made no reference to Cronk in support of her decision to deny damages for vacation pay during the reasonable notice period.

Given that the entitlement to vacation pay arises in the context of a termination without cause and in breach of an implied term of an employment contract to give reasonable notice, it doesn’t seem logical to penalize the dismissed employee by withholding vacation pay but paying salary in lieu of it. Nevertheless, employers often argue that to provide additional compensation with respect to vacation pay to an employee who hasn’t in fact had to provide services would amount to double recovery.

In my view, this argument is flawed because it involves an opportunistic segregation of the dismissed employee’s entitlement to salary and vacation pay in lieu of notice. It’s helpful to keep in mind that reasonable notice is nothing more than a legal fiction used to measure damages. It doesn’t purport to replicate actual employment. Therefore, during the reasonable notice estimated by the court in fixing damages, there’s no ongoing relationship with mutual contractual obligations of providing services in exchange for pay. It’s thus artificial to speak in terms of not having to provide services in order to disentitle employees of their vacation pay during the reasonable notice period.

This proposition arose in the British Columbia Court of Appeal’s decision in Bavaro v. North American Tea, Coffee & Herbs Trading Co. Inc., in which the court had no problem with the notion that vacation pay within the notice period would amount to double recovery. “With deference, I do not think that in the great majority of cases a discharged employee sees the notice period as anything like a vacation,” wrote Justice Ian Donald. “Either the employee is looking for a new job or has found one and must report to work. The prospect of taking a vacation is likely not even a consideration.”

In light of British Columbia Court of Appeal’s thoughtful rationale, perhaps the future courts should factor the effect of a spoiled vacation that the dismissed employee took during the notice period — but without gratification due to the emotional distress caused by the dismissal — when assessing an award of vacation pay in lieu of reasonable notice.