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Unjustified claim of cause costs employer more than $1.1 million

A couple of months ago, I got a call from an employer: an employee had claimed and been reimbursed for inflated expenses. They called me to draft the termination letter as swiftly as possible, because, they said: we clearly have cause.

Well, maybe … but maybe not. It might not be such a clear cut case of cause after all. At least not in the eyes of the law.

The reality is judges do not like upholding dismissals for cause, even when the cases seem pretty clear to us that the employee has engaged in fairly serious misconduct. Why? The purpose of giving an employee notice or pay in lieu of the termination of their employment is to get them from your workplace to the next one. There has to be a fairly egregious and irreparable breach of the employment relationship for a judge to deprive an employee of that bridge to their next paycheque. Every case is considered on its own facts and all mitigating and ameliorating factors will be assessed.

But you are convinced you have a slam dunk case for cause and it needs to be asserted based on principle. So, cause it is. You can always pay something later if it’s challenged, right? What’s the worst that could happen? Let’s take a look.

Initially hired as a sales representative, Scott Ruston quickly moved through the ranks at Keddco to become president. In 2015 at 54 years of age and after 11 years of employment, the company fired him for cause. They said that he committed fraud, but they didn’t provide him with details of the allegations. He sued for wrongful dismissal.

Keddco defended and, to boot, filed a counterclaim for $1.7 million for unjust enrichment, breach of fiduciary duty and fraud, as well as $50,000 in punitive damages. It had cause after all.

The trial judge didn’t agree, to the tune of more than $600,000. The court held not only that Keddco didn’t prove cause, but its counterclaim was intended to intimidate Ruston and had breached its obligation of good faith and fair dealing in the manner of Ruston’s dismissal. Ruston was awarded 19 months’ notice (including bonus and benefits), $100,000 in punitive damages and $25,000 in moral damages.

Surely the trial judge was wrong, thought Keddco. It appealed.

The trial judge was right, said the court of appeal. In upholding the 19-month notice period, the court considered different factors, including that Ruston had been fired based on serious allegations of cause and had not been provided a letter of reference impacting his ability to find a new job.

The court of appeal said the trial judge was also right in awarding aggravated damages: Keddco threatened Ruston not to make a claim and the counterclaim was calculated to, and did, cause Ruston stress, as did the manner of dismissal, which was devastating to him.

The punitive damages award was also upheld: Keddco threatened in the termination meeting to counterclaim if Rustco sued – a threat it made good on and maintained into the trial. Keddco circulated its unfounded allegations of fraud publicly and privately, yet seemed to have no intention to prove damages. It was using the counterclaim solely as an intimidation tactic.

In the end, Keddco was liable for more than $1.1 million to Rustco for its unjustified claim of cause: the court awarded almost $547,000 in costs in addition to the more than $600,000 in damages. You can read about the costs award in one of our earlier blog posts.

The takeaways:

  1. It is an exception rather than a rule for allegations of cause to be upheld by courts.
  2. Unjustified or unproven claims of cause are very costly: only consider asserting cause in cases of the most serious misconduct where there is a fundamental and irreparable breach of the employment relationship and keep the allegations private.
  3. Immediately forego allegations of cause when legitimate weaknesses and risks are revealed in maintaining the position, no matter what point you are at in the negotiation or litigation process.
  4. Even if just cause can be proven under the common law, it may not comprise wilful misconduct, disobedience or wilful neglect of duty under employment standards legislation. As a result, statutory notice, severance and benefits may still be owed even if common law reasonable notice is not.
  5. Consider providing some pay in lieu of notice without prejudice to the assertion of cause. It might ameliorate some of the liability for the failure to act in good faith if cause is ultimately not substantiated.
  6. Provide a letter of reference that speaks to any strengths of the employee without compromising the basis for which the employer is asserting cause; it’s in the employer’s best interest that the employee find a new job quickly to reduce the pay in lieu of notice owed.