Mulvihill v. The Corporation of the City of Ottawa

[Indexed as: Mulvihill v. Ottawa (City)]

90 O.R. (3d) 285

Court of Appeal for Ontario,

Doherty, Moldaver and Gillese JJ.A.

March 25, 2008

Employment -- Wrongful dismissal -- Damages -- Wallace damages -- Employer having reasonable basis to believe that it had grounds to dismiss employee for cause -- Employer withdrawing just cause defence at outset of trial of employee's wrongful dismissal action -- Initial allegation of just cause not constituting basis for award of Wallace damages for bad faith conduct or unfair dealing in manner of dismissal -- Fact that employee was on sick leave at time of dismissal not constituting basis for award of Wallace damages in circumstances of this case. [page286]

The plaintiff was employed by the defendant City, reporting to F, who in turn reported to the City Clerk, P. The plaintiff complained of harassment by F and another employee. The plaintiff was off work at the time, allegedly for medical reasons. She refused to return to work in the same area, under F's supervision. The defendant investigated and dismissed the harassment complaint. The plaintiff did not utilize the defendant's harassment policy, which provided for the review of a complaint that has been dismissed at the initial stage. Instead, she complained about F and P in an e-mail addressed to the City Manager and the Mayor. The defendant sent a letter to the plaintiff dismissing her for insubordination. She brought an action for damages for wrongful dismissal. At the outset of the trial, the defendant withdrew its just cause defence and paid the plaintiff the equivalent of three months' salary in lieu of notice, the amount it believed it was required to pay pursuant to the severance provisions of the employment contract. The trial judge awarded the plaintiff four and a half months' compensation in lieu of notice, and also awarded her Wallace damages of five and a half months' salary and benefits on the basis that the defendant engaged in bad faith conduct or unfair dealing in the course of the dismissal. The defendant appealed the award of Wallace damages.

Held, the appeal should be allowed.

The fact that the defendant terminated the plaintiff's employment for cause and then abandoned cause as a defence at the outset of the trial did not warrant an award of Wallace damages. As long as an employer has a reasonable basis on which to believe it can dismiss an employee for cause, the employer has a right to take that position without fear that failure to succeed on the point will automatically expose it to a finding of bad faith. The defendant held, and acted on, an honest and reasonably held belief that the plaintiff's insubordination gave rise to just cause for termination. There was nothing in the dismissal letter that was untruthful, misleading or insensitive. The trial judge also based his award of Wallace damages on his finding that the defendant made a "mistake" in dismissing the plaintiff while she was on sick leave. The legal standard against which conduct is to be measured for the purpose of Wallace damages is not whether an employer made a mistake but, rather, whether the employer engaged in unfair or bad faith conduct. A mistake is not conduct that can be said to be unfair or bad faith. Thus, dismissal while the plaintiff was on sick leave did not constitute a basis for an award of Wallace damages in the circumstances of this case. The award of Wallace damages was set aside.

APPEAL from award of damages by Roy J. of the Superior Court of Justice, dated November 2, 2006, in a wrongful dismissal action.

Cases referred to

Marshall v. Watson Wyatt & Co. (2002), 2002 13354 (ON CA), 57 O.R. (3d) 813, [2002] O.J. No. 84, 209 D.L.R. (4th) 41, 155 O.A.C. 103, 16 C.C.E.L. (3d) 162, [2002] CLLC Â 210-019, 111 A.C.W.S. (3d) 75; Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94, 152 D.L.R. (4th) 1, 219 N.R. 161, [1999] 4 W.W.R. 86, J.E. 97-2111, 123 Man. R. (2d) 1, 3 C.B.R. (4th) 1, 36 C.C.E.L. (2d) 1, 97 CLLC Â 210-029, 74 A.C.W.S. (3d) 788, consd

Other cases referred to

Coupe v. Malone's Restaurant Ltd., [2006] B.C.J. No. 2045, 2006 BCSC 1350, 59 B.C.L.R. (4th) 353, 151 A.C.W.S. (3d) 863 (S.C.); Daniel v. Survival Systems Ltd., 2000 NSSC 64, [2000] N.S.J. No. 349, 188 N.S.R. (2d) 259, [2001] CLLC Â210-012, 100 A.C.W.S. (3d) 811 (S.C.); Havens v. John Watson Ltd. (c.o.b. "Watson Gloves"), [1999] B.C.J. No. 1201, 88 A.C.W.S. (3d) 597 (S.C.); Hill v. Church of Scientology of Toronto (1995), 1995 59 (SCC), 24 O.R. (3d) 865, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64, 126 D.L.R. (4th) 129, 184 N.R. 1, J.E. 95-1495, 84 O.A.C. 1, 25 C.C.L.T. (2d) 89, 30 C.R.R. (2d) 189, 56 A.C.W.S. (3d) 495; [page287] Keays v. Honda Canada Inc. (2006), 2006 33191 (ON CA), 82 O.R. (3d) 161, [2006] O.J. No. 3891, 274 D.L.R. (4th) 107, 216 O.A.C. 3, 52 C.C.E.L. (3d) 165, [2006] CLLC Â230-030, 151 A.C.W.S. (3d) 612 (C.A.) [Leave to appeal to S.C.C. granted [2006] S.C.C.A. No. 470]; Laszczewski v. Aluminart Products Ltd., 2007 56493 (ON SC), [2007] O.J. No. 4991, 62 C.C.E.L. (3d) 305, 162 A.C.W.S. (3d) 615 (S.C.J.); Linsdell v. Squamish W K Enterprises Inc., [2003] B.C.J. No. 249, 2003 BCSC 188, 119 A.C.W.S. (3d) 961; MacMillan v. Brantpack Distributing Ltd., 2006 23262 (ON SC), [2006] O.J. No. 2796, 52 C.C.E.L. (3d) 125, 149 A.C.W.S. (3d) 823 (S.C.J.); Martell v. Ewos Canada Ltd., [2005] B.C.J. No. 60, 2005 BCSC 43, 137 A.C.W.S. (3d) 333; Porta v. Weyerhaeuser Canada Ltd., [2001] B.C.J. No. 2180, 2001 BCSC 1480, 108 A.C.W.S. (3d) 1000; Robinson v. Fraser Wharves Ltd., [2000] B.C.J. No. 212, 2000 BCSC 199, 5 C.C.E.L. (3d) 81, 94 A.C.W.S. (3d) 687; Sommerard v. I.B.M. Canada Ltd., 2006 9581 (ON CA), [2006] O.J. No. 1209, 265 D.L.R. (4th) 484, 208 O.A.C. 291, 48 C.C.E.L. (3d) 1, [2006] CLLCÂ 210-019, 146 A.C.W.S. (3d) 998 (C.A.)

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43 Human Rights Code, R.S.O. 1990 c. H.19

Thomas G. Conway and Helen Gray, for appellant. David S. Steinberg and John J. Adair, for respondent.

The judgment of the court was delivered

GILLESE J.A.: --

Overview

[1] Donna Mulvihill was employed on an occasional, part-time basis by the former City of Kanata from 1997 to December 31, 2000. In July 2001, Ms. Mulvihill accepted an offer of full- time employment from the City of Ottawa. The written contract of employment, dated July 3, 2001 (the "Contract"), provided that on termination of employment without cause, the City would pay severance in accordance with a formula based on years of service.

[2] In the fall of 2004, Ms. Mulvihill complained that she was the victim of harassment. The City investigated, and dismissed, the complaint. Ms. Mulvihill was not satisfied with the results of the City's investigation. She refused to return to her workplace unless the City found her a new position in another department. She did not attempt to have her harassment complaint reviewed in accordance with the City's policy. Instead, she complained about her supervisors in an e-mail message addressed to the City Manager and the Mayor, the City's two most senior officials.

[3] The City dismissed Ms. Mulvihill on November 16, 2004, for [page288] insubordination. She sued, alleging that she had been wrongfully dismissed. At the outset of trial, the City withdrew the just cause defence and paid Ms. Mulvihill the equivalent of three months' salary in lieu of notice. It believed that was the amount it was required to pay pursuant to the severance provisions of the Contract. The City also paid prejudgment interest in accordance with the Courts of Justice Act, R.S.O. 1990, c. C.43.

[4] By judgment dated November 2, 2006 (the "Judgment"), the trial judge awarded Ms. Mulvihill four and a half months' compensation in lieu of notice.[^1] The amount was higher than that which the City had determined it was required to pay under the Contract because the trial judge included the period during which Ms. Mulvihill had worked for the City of Kanata. The City does not appeal this term of the Judgment.

[5] The trial judge also awarded Ms. Mulvihill "Wallace" damages[^2] of five and a half months' salary and benefits, and $50,000 in costs. The City appeals the Wallace award and seeks leave to appeal the costs award.

[6] Ms. Mulvihill cross-appeals. She argues that the trial judge wrongly held that she was bound by the terms of the Contract. She asks that the City be ordered to pay damages based on reasonable notice at common law rather than in accordance with the severance provisions of the Contract.

[7] The court did not call on the respondent on the costs appeal nor did it call on the appellant to respond to the cross-appeal. In light of the conclusion I reach on the appeal, it is unnecessary to say anything about the costs appeal. As for the cross-appeal, the court saw no merit in it. Suffice to say that there is no basis on which to interfere with the trial judge's finding that Ms. Mulvihill was bound by the terms of the Contract.

[8] The sole remaining issue to be decided on this appeal is whether the trial judge erred in awarding Wallace damages. For the reasons that follow, I would allow the appeal.

Background

The events leading up to dismissal

[9] Ms. Mulvihill began work for the City in July 2001. On [page289] April 15, 2002, she was appointed to the position of Advisory Committee Coordinator in Secretariat Services, within the Corporate Services Department of the City. In that position, she was responsible for supporting the work of the advisory committees to City Council, coordinating meetings, taking minutes, preparing agendas and attending meetings. She reported to Elaine Fleury, Manager of Council and Committee Services. Ms. Fleury reported to the City Clerk, Pierre Pagé.

[10] While employed as the Advisory Committee Coordinator, Ms. Mulvihill asked to work from her home because her son had been diagnosed with an attention deficit disorder. The City accommodated this request.

[11] The City was facing serious budget cuts at the end of 2003. Consequently, work assignments and responsibilities were being restructured, including in the unit in which Ms. Mulvihill worked. This led to Ms. Fleury sending Ms. Mulvihill a memo dated November 19, 2003. The memo stated that beginning in January 2004, Ms. Mulvihill would be required to work the original hours of employment she had agreed to when she accepted full-time employment with the City. The memo also stated "There will continue to be the same flexibility around meeting days and adequately arranged working at home days (as agreed by both parties) as occasion requires." The memo further indicated that there were other options available, such as job sharing, and that Ms. Fleury would be pleased to discuss the options if Ms. Mulvihill was interested.

[12] Both before and after the communication on November 19, 2003, the record is replete with evidence that Ms. Mulvihill's immediate supervisors and coworkers were increasingly dissatisfied with Ms. Mulvihill's performance as an employee because of her failures to complete work, maintain civil relations with coworkers and attend at the workplace. It also includes evidence that:

(a) coworkers and supervisors complained that Ms. Mulvihill was spreading rumours about a particular employee's position being cut;

(b) Ms. Mulvihill's immediate supervisor found Ms. Mulvihill to be so intimidating and aggressive that she (the supervisor) asked to be reassigned to a different group;

(c) the chairperson of one of the Council Advisory Committees that Ms. Mulvihill supported complained about Ms. Mulvihill's performance and asked that Ms. Mulvihill be reassigned; [page290]

(d) another chairperson of a different advisory committee complained that Ms. Mulvihill had misinformed the committee on a material issue; and,

(e) there were general complaints about the quality of Ms. Mulvihill's work, the effectiveness of her communication skills and her lack of cooperation.

[13] Matters came to a head on September 13 and 14, 2004. On September 13, Ms. Mulvihill sent an e-mail to Diane Blais, one of her coworkers, asking for information. Ms. Blais responded with a sarcastic e-mail saying that she had sent the information out previously so people could look it up. Various other e-mails followed that day. On September 14, Ms. Blais sent an e-mail to Ms. Mulvihill, in which she criticized Ms. Mulvihill's attitude and performance as an employee (the "September 14 e-mail" or the "e-mail incident"). Ms. Blais' comments in the September 14 e-mail were couched in harsh and inappropriate terms.

[14] Ms. Mulvihill reacted to the September 14 e-mail by sending Mr. Pagé a two-and-a-half-page memorandum of complaint dated September 16, 2004 (the "Memorandum"). In the Memorandum, Ms. Mulvihill criticized Ms. Blais and Ms. Fleury and complained that she was the victim of harassment, the particulars of which were:

(a) the e-mail exchange between Ms. Mulvihill and Ms. Blais;

(b) Ms. Fleury's failure to respond to the e-mail exchange, on which she had been copied; and

(c) Ms. Fleury's meetings with Ms. Mulvihill about Ms. Mulvihill's absences from the workplace.

[15] Ms. Fleury had been an employee of the City since 1971. In 1994, she was appointed Manager, Council and Committee Services, reporting to Mr. Pagé. Prior to this, Ms. Fleury had never been accused of any form of harassment.

[16] Shortly after sending the Memorandum, Ms. Mulvihill asked that it be treated as a formal complaint of harassment. Although it had not been submitted in accordance with the City's process for filing a formal complaint, the City determined that an investigation of the complaints in the Memorandum would be undertaken.

[17] Various events took place soon thereafter. Daria Ghaby, a human rights and employment equity consultant assigned to [page291] assist the parties in resolving Ms. Mulvihill's complaint, provided advice to the City about how to investigate and deal with the harassment allegation and investigation. She had extensive communication with Ms. Mulvihill. She sent Ms. Mulvihill information on the steps that could be taken when a City employee felt harassed and she explained the process for filing a formal complaint. She provided Ms. Mulvihill with the necessary forms and documentation.

[18] Ms. Mulvihill did not attend work. She provided the City with a note from her doctor dated September 20, 2004, which stated she "was unable to work for medical reasons" from September 20 to October 17, 2004.

[19] Following the Branch investigation into the matter, on October 28, 2004, a meeting was held at the City Clerk's Office. Ms. Mulvihill, Mr. Pagé, Deputy City Clerk Rick O'Connor and Ms. Ghaby were present. Ms. Mulvihill was told that both Ms. Fleury and Mr. Pagé had spoken to Ms. Blais promptly about the offending e-mail and that they had reprimanded Ms. Blais for the use of inappropriate language in her e-mail.

[20] Ms. Mulvihill stated that she had "zero respect" for Ms. Fleury and that she worked "for the biggest group of backstabbers". She said she did not want to return to work in the area and that she wanted it resolved so she would not have to come back to work under Ms. Fleury's supervision.

[21] According to Mr. O'Connor's handwritten notes of the October 28 meeting, the following exchange then took place. Ms. Mulvihill was asked whether, if the City found a job "tomorrow" outside Ms. Fleury's group, she would go back to work. Ms. Mulvihill replied "yes, if my doctor says it's OK". Ms. Mulvihill was then asked if accommodation was for her or her son's disability. Ms. Mulvihill replied "No, it's his disability." Ms. Mulvihill was again asked, "So the ongoing issue is to accommodate your son's ongoing condition, not yours?" Ms. Mulvihill responded "Yes. If this had been official[^3] none of this would have happened."

[22] As a result of Ms. Mulvihill's statements at the meeting on October 28, the City representatives present at the meeting concluded that Ms. Mulvihill was well enough to return to work, but was refusing to return because she did not wish to work under Ms. Fleury's supervision. [page292]

[23] Immediately after the October 28 meeting, Mr. O'Connor, Mr. Pagé and Ms. Ghaby discussed what steps should be taken. They concluded that the City would investigate other specific points Ms. Mulvihill had raised during the October 28 meeting. They formulated a plan that included investigating the additional matters that had been raised and holding further meetings with Ms. Mulvihill. They anticipated a written, formal request for accommodation from Ms. Mulvihill.

[24] Mr. O'Connor conducted the investigation. At that point, Mr. O'Connor's background included more than a dozen years as a labour and employment lawyer for the former region of Ottawa- Carleton. He had joined the Secretariat Services Branch only in February 2001.

[25] On November 5, 2004, the City sent Ms. Mulvihill a letter in which it reported the results of the investigation. The letter was signed by Mr. Pagé. The letter began by explaining that it was a response to her allegations of harassment in the Memorandum and those she had made in the October 28 meeting. It also stated that as a result of Ms. Mulvihill's concern that Mr. Pagé would not be objective or fair in an investigation into her allegations due to his long working association with Ms. Fleury, he had instructed Mr. O'Connor to conduct the investigation. He summarized Mr. O'Connor's background, set out above. He explained that it was Mr. O'Connor's findings that were contained in the letter.

[26] The seven-page letter report thoroughly canvassed the e- mail incident and the various allegations of harassment made in respect of Ms. Fleury. It explained why the September 14 e- mail, although inappropriate and unprofessional, did not constitute harassment and reiterated that both he and Ms. Fleury had addressed the situation. After describing the various allegations Ms. Mulvihill had made in respect of Ms. Fleury, he explained why they did not constitute harassment, in his view. He concluded that the investigation had raised a number of ongoing, performance-related issues that would have to be addressed on her return to work and suggested that her return raised questions of possible accommodation. He reiterated certain elements of the City's accommodation policy and suggested that if she thought it necessary, she should file the appropriate documentation directly with Ms. Ghaby.

[27] On November 8, 2004, Ms. Mulvihill wrote Mr. Pagé a six- page letter in which she stated:

(a) "I can only reiterate my original belief that, given your relationship with Elaine [Fleury], you would not be able to remain unbiased";[page293]

(b) "It is my opinion that Elaine Fleury be stripped of her managerial responsibilities as she has proven to be incapable of performing duties as they relate to equal treatment of staff"; and,

(c) "My request was, and remains, that I be moved to a position away from Elaine's authority and, in light of your biased written response, away from your direction".

[28] On November 9, 2004, Ms. Mulvihill sent an e-mail entitled "Harassment Complaint" to Greg Geddes and Kent Kirkpatrick, two senior City officials, as well as to "Mayor Bob Chiarelli". Although the e-mail indicated it was being sent to the Mayor, his e-mail address was incorrect.

[29] Ms. Mulvihill did not utilize the provision in the City's harassment policy which provides for the review of a complaint that has been dismissed at the initial stage.

[30] Mr. Pagé convened a meeting of his management staff and representatives from the City's human resources and law departments to consider how to respond to Ms. Mulvihill's letter of November 8, 2004, and her e-mail of November 9, 2004. As a result of the meeting, the City decided to terminate Ms. Mulvihill's contract of employment for insubordination and because she had refused to return to work after having been so requested.

The dismissal letter

[31] On November 16, 2004, Ms. Mulvihill was still at home on sick leave. The City dismissed her by means of a letter of that date (the "Dismissal Letter") delivered to her home.

[32] As the Dismissal Letter plays a central role in this matter, it is set out below in its entirety.

Dear Ms. Mulvihill:

I am writing in response to your recent letter of November 8, 2004.

At the outset, let me express my dismay at the tone of, and the accusations contained in, your correspondence. I have, at all times, addressed you in a respectful fashion and I would have been most appreciative of comparable treatment in return.

Clearly, you are not prepared to accept Rick O'Connor's findings in relation to your allegations of workplace harassment. Instead, you have chosen to question Elaine Fleury's competence, going so far as to express your opinion that "she should be stripped of her managerial responsibilities". Furthermore, you have taken issue with the Deputy Clerk's findings and directly challenged my own credibility, requesting a reassignment away from my [page294] direction. I understand that you have also forwarded your views in this regard both to Greg Geddes, Chief Corporate Services Officer, Kent Kirkpatrick, City Manager and to the Mayor. Your behaviour in this instance is a clear and unequivocal example of grave insubordination.

While you have alleged that the City has failed to meet its obligations in respect of its Duty to Accommodate Policy, I have conferred with Human Rights and Employment Equity staff and understand that you have not provided to them "your accommodation requirements and the rationale for same", as requested in my last letter. Though you have confirmed that you have no medical condition, nor any personal circumstances that would preclude you from returning to work immediately, you have made clear in your letter that you will not return to any position within the Secretariat Services Branch.

In light of the above and your clearly insubordinate conduct, I have no choice but to terminate your employment with the City of Ottawa, effective immediately. I would ask that you make arrangements through Bob Gauvreau, Manager, Corporate Security at Ext. 26628, for the return of all City property (including files, keys, etc.) or identification, and for the removal of your personal belongings.

Yours very truly,

[signed]

P.G. Pagé

Director, Secretariat

Services, City Clerk

Events following the dismissal letter

[33] After she received the Dismissal Letter, Ms. Mulvihill sued the City for wrongful dismissal.

[34] In July 2005, following examinations for discovery, the City sought Ms. Mulvihill's consent to amend its Statement of Defence to withdraw the just cause defence and offered to pay Ms. Mulvihill severance in accordance with the provisions of the Contract. Ms. Mulvihill refused to consent to the amendment unless the City paid her costs on a substantial indemnity scale. The City offered to pay costs on a partial indemnity scale to the date of the withdrawal of the just cause defence, but that offer was refused.

[35] At the commencement of trial, the City moved to so amend the Statement of Defence. The amendment was ordered, without costs.

[36] Following withdrawal of the just cause defence, the City paid Ms. Mulvihill the equivalent of three months' salary and benefits plus prejudgment interest on that amount. In doing so, [page295] the City understood that it had complied with the severance provisions of the Contract.

[37] At trial, Ms. Mulvihill was awarded the equivalent of ten months' salary and benefits -- four and a half months pursuant to the severance provisions in the Contract and five and a half months by way of Wallace damages.

The Trial Judgment

The reasoning on Wallace damages

[38] After setting out the parties' positions on this matter, the trial judge quoted the following passage from the Wallace decision:

However, when termination is accompanied by acts of bad faith in the manner of discharge, the results can be especially devastating. In my opinion, to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period.

[39] The full text of his reasons for awarding Wallace damages are contained in paras. 21 to 23. Those paragraphs read as follows:

There is no doubt that the Plaintiff was a difficult employee. It is obvious from the evidence that all those who had dealings with her were exasperated and frustrated with the Plaintiff. They were caught in a situation where fellow employees were highly critical of the Plaintiff and yet she appeared not to want to respond in any way to the accommodation that was proposed by the Defendant. Nevertheless, even a difficult employee is entitled to be treated fairly.

I have heard the evidence and observed the witnesses, Pierre Pagé, Elaine Fleury and Rick O'Connor, all who appear to be reasonable and compassionate people. How could they collectively decide that they had grounds to dismiss the Plaintiff for cause, especially when they knew she was on sick leave? That conduct can only be characterized as callous and insensitive. In my opinion, therefore, the notice period has to be lengthened to compensate the Plaintiff for the actions of the Defendant.

Counsel for the Plaintiff has cited a number of decisions from this Court where Wallace damages are in the range of three to nine months. Clearly, this matter does not warrant damages at the top end of the range where that the conduct of the employers cited in the decisions was far more callous and insensitive than the actions of the Defendant. On the other hand, damages at the low range usually involve only dismissal for cause which is unjustified. In this case, we have not only dismissal for cause which was not warranted, but was made by the Defendants when they knew that the Plaintiff was on sick leave. Accordingly, I would enhance the period of notice to 10 months to take into account the Wallace damages. [page296]

Reasoning on punitive damages

[40] The trial judge rejected Ms. Mulvihill's claim for punitive damages. In so doing, he rejected the allegation that the City's actions were a reprisal for her having filed a harassment complaint. He stated that in reviewing the accusations made by Ms. Mulvihill against Ms. Fleury and her coworkers in her letter of September 16, 2004, repeated in the October 28 meeting and further repeated in her letter of November 8, 2004, he could not help but conclude that the "strong accusations" required a response. He found that the City's response could "hardly be characterized as a reprisal". He found no breach of the Human Rights Code, R.S.O. 1990, c. H.19.

[41] The trial judge went on to consider whether the criteria for awarding punitive damages set out in Hill v. Church of Scientology of Toronto (1995), 1995 59 (SCC), 24 O.R. (3d) 865, [1995] 2 S.C.R. 1130, [1995] S.C.J. No. 64 had been met. In concluding that they had not been met, he stated:

I have listened [to] and observed the evidence of Pierre Pagé, Elaine Fleury and Rick O'Connor. In my opinion, all three are honourable, longstanding and valuable employees of the City of Ottawa. Undoubtedly, they were frustrated and exasperated with a difficult employee whose conduct was undermining the morale of her co-workers. They made a mistake in dismissing the Plaintiff at a time when she was on sick leave. That is the reason that Wallace damages have been awarded to the Plaintiff. On the other hand, the Defendant's conduct could hardly be categorized as malicious, oppressive and high-handed.

The Issue

[42] The issue raised on this appeal is whether the trial judge erred in awarding Wallace damages.

The Award of Wallace Damages

[43] It will be recalled that the Contract provides that on termination of employment without cause, severance is to be paid in accordance with a formula based on years of service. The parties did not question the right of the court to award Wallace damages in such a situation. Nothing in these reasons should be taken as having decided that matter.

[44] In Wallace, the Supreme Court of Canada held that an employee may be compensated, by an extension of the reasonable notice period, when the employer's conduct in the manner of dismissal falls below an acceptable standard. At para. 98, the court explained the standard that employers must meet, when dismissing an employee, in the following terms: [page297]

[A]t a minimum, I believe that in the course of dismissal employers ought to be candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.

[45] In short, when dismissing employees, employers are to act fairly. They should be candid, reasonable, honest and forthright. If they act otherwise during the dismissal process -- for example, by being untruthful, misleading or unduly insensitive -- they may be held to have conducted themselves in an unfair or bad faith manner. The onus is on the employee to establish that the employer engaged in bad faith conduct or unfair dealing in the course of dismissal, and that the employee's injuries flow not from the dismissal but from the manner in which dismissal was effected (Wallace at para. 103).

[46] A trial judge's determination that an employer has, when dismissing an employee, engaged in bad faith conduct or unfair treatment is based on findings of fact. As an appellate court, we must show appropriate deference to those factual findings; they are not to be set aside absent palpable and overriding error.[^4] Nonetheless, as I will explain, the trial judge erred in law in awarding Wallace damages.

[47] The trial judge gave two reasons for concluding that the City's conduct warranted an award of Wallace damages. The first is that the City's dismissal of Ms. Mulvihill for cause was "not warranted". The second is that Ms. Mulvihill was dismissed while she was on sick leave. An examination of those reasons shows that, in the circumstances of this case, neither supports a determination that in the course of dismissing Ms. Mulvihill, the City engaged in conduct that was unfair or in bad faith.

Dismissal for cause

[48] It is not clear exactly what the trial judge meant when he described the City's dismissal of Ms. Mulvihill for cause as "not warranted".

[49] It cannot mean that because the City terminated Ms. Mulvihill's employment for cause but abandoned cause as a defence during the course of litigation, its initial act of alleging cause for dismissal was not warranted. The mere fact that cause is alleged, but not ultimately proven, does not automatically mean that Wallace damages are to be awarded. So long as an employer has a reasonable basis on which to believe it can dismiss [page298] an employee for cause, the employer has the right to take that position without fear that failure to succeed on the point will automatically expose it to a finding of bad faith.[^5]

[50] In determining whether Wallace damages are to be awarded, the court must consider all of the circumstances in order to determine whether an employer engaged in unfair or bad faith conduct in the course of dismissal. An allegation of cause is but one of those circumstances.

[51] So, for example, if an employer has no reasonably plausible basis on which to dismiss an employee for cause but, nonetheless, terminates the employment relationship on the basis of just cause, the employer's conduct may be found to amount to unfair or bad faith treatment. That is because baseless, unfounded or fabricated allegations of misconduct sufficient to constitute cause are, by definition, untruthful, misleading and insensitive -- the very descriptions of bad faith or unfair conduct given in Wallace.

[52] Such was the situation in Marshall v. Watson Wyatt & Co. (2002), 2002 13354 (ON CA), 57 O.R. (3d) 813, [2002] O.J. No. 84 (C.A.). In Marshall, the plaintiff worked for a human resources consulting firm. She headed up its organizational communications practice in Canada. After serving in that capacity for a year, she was fired. When she sued for wrongful dismissal, the company defended on the basis it had dismissed her for just cause. It abandoned that defence shortly before trial.

[53] The jury found that a reasonable notice period was nine months. It gave a further three months for Wallace damages. On appeal, the employer argued that the jury's finding of bad faith or unfair dealing should be set aside.

[54] In holding that the record amply supported the jury's finding of bad faith conduct, this court referred to the fact that the [page299] employer had claimed just cause in its statement of defence, even though -- to its knowledge -- the dismissal was due to a corporate restructuring. Further, the employer's statement of defence contained allegations of misconduct on the part of the plaintiff that struck at the heart of her professional abilities. In addition, the employer refused to pay her approximately $80,000 in commission revenues acknowledged to be owing to her, and delayed for several months before sending her the record of employment required for unemployment insurance benefits. All of these matters "affected her ability to market herself and deprived her of money needed to start her own business": para. 41. The court concluded that the employer had practised the kind of "hardball" warned against in Wallace.

[55] The fact that in the present case the City abandoned the just cause defence at the outset of trial cannot be taken as evidence of bad faith or unfair dealing at the time of dismissal. There are numerous reasons why an employer might resile from the position that dismissal was for cause, including a willingness to compromise and to resolve disputes without the necessity of a trial. Employers must be free to abandon a position based on cause without fear that abandonment will automatically lead to liability for Wallace damages.

[56] I return to the question of what the trial judge meant by saying that dismissal was "not warranted". Reading the reasons as a whole, it appears to mean that at the time the Dismissal Letter was sent, the trial judge found the City to have had no basis on which it could reasonably believe it could dismiss Ms. Mulvihill for cause.

[57] That finding is not available on the record. This was not a case of an employer playing "hardball" by asserting cause when there was no reasonable basis for such an assertion. The record shows that the City held, and acted on, an honest and reasonably held belief that Ms. Mulvihill's insubordination gave rise to just cause for termination. This evidence included:

-- Ms. Mulvihill's persistent and unfounded allegations of bias and incompetence against her manager and the City Clerk;

-- Ms. Mulvihill's refusal to return to employment unless the City met her condition that she be transferred to another City department; and

-- Ms. Mulvihill's escalation of her complaint, including her e-mail on November 9, 2004, in which it appeared that she had involved the Mayor in her allegations of harassment. [page300]

[58] Indeed, the notion that the City had no basis on which it could reasonably believe it could dismiss Ms. Mulvihill for cause is at odds with the other findings of the trial judge. First, there is the trial judge's clear and unequivocal rejection of Ms. Mulvihill's claim that dismissal was a reprisal for her having brought a claim of harassment. After listing a number of instances in which Ms. Mulvihill had levied accusations against Ms. Fleury and other City workers, both orally and in writing, the trial judge states, at para. 30 of the reasons,

I cannot help but conclude these are indeed strong accusations that require some response. The response that followed from Elaine Fleury and Dawn Whelan and then the investigation by Rick O'Connor can hardly be categorized as reprisal. The incidents complained of by [Ms. Mulvihill] had to be reviewed and context had to be given to the circumstances outlined by [Ms. Mulvihill].

[59] Second, the trial judge found Ms. Mulvihill was a "difficult employee whose conduct was undermining the morale of her co-workers" and who "appeared not to want to respond in any way to the accommodation that was proposed by the [City]". Pierre Pagé, Elaine Fleury and Rick O'Connor, on the other hand, were found to be "reasonable and compassionate people" and "honourable, longstanding and valuable" City employees who were frustrated and exasperated with a difficult employee.

[60] Third, it is notable that after hearing considerable evidence on the allegations of harassment, the trial judge made no finding that Ms. Mulvihill's allegations of harassment had any merit or had been in any way substantiated.

[61] Wallace instructs employers to be "candid, reasonable, honest and forthright" in the course of dismissal. There is nothing in the Dismissal Letter that was untruthful, misleading or insensitive. The City was candid, honest and forthright about why it was dismissing Ms. Mulvihill. It explained that her employment was terminated because the City viewed her actions as insubordination and it explained the specific conduct that gave rise to that view. Contrary to the implied assertion in para. 22 of the trial judge's reasons (supra, at para. 39), it cannot be said that the City's position was unreasonable. As I have explained, the City held and acted on an honest, reasonably held belief that Ms. Mulvihill's conduct constituted insubordination amounting to just cause for dismissal.

[62] In the circumstances, the dismissal for cause cannot serve as a basis on which to make a finding that the City acted in bad faith or unfairly. [page301]

Termination of employment while on sick leave

[63] The trial judge stated that "even difficult employees deserve to be treated fairly" in the manner of dismissal. I agree. It is within that context that I consider the second reason given by the trial judge for awarding Wallace damages, namely, that dismissal occurred while Ms. Mulvihill was on sick leave.

[64] The City officials who made the decision to end the employment relationship testified that it was their understanding that Ms. Mulvihill was at home following the October 28 meeting either because of her son's needs or because she would not return to work until she was given a position in another City department. Given the exchange in the October 28 meeting, described above at para. 21, one can see how they could reasonably arrive at that view. However, there was evidence that Ms. Mulvihill was home on sick leave due to the stresses she was experiencing at work. Accordingly, it was open to the trial judge to so find and there is no basis on which to interfere with that finding.

[65] However, the trial judge also found that the City made a "mistake" in dismissing Ms. Mulvihill while she was on sick leave. As explained above, the legal standard against which conduct is to be measured for the purposes of Wallace damages is not whether an employer made a mistake but, rather, whether the employer engaged in unfair or bad faith conduct. A mistake is not conduct that can be said to be unfair or bad faith. Thus, on the finding of the trial judge, dismissal while Ms. Mulvihill was on sick leave did not constitute a basis for the award of Wallace damages.

[66] Nor could it, in the circumstances. The mere fact that Ms. Mulvihill was on sick leave at the time of termination does not necessarily mean the dismissal was conducted in an unfair or bad faith manner. There must be other evidence of bad faith, unfair dealing or "playing hardball", such as cancellation of accommodation for an employee's illness as a reprisal for the employee having made a human rights claim: see Keays v. Honda Canada Inc., supra.

[67] In the present case, as has been noted, the trial judge expressly found that dismissal was not an act of reprisal for Ms. Mulvihill having made allegations of harassment. Further, the trial judge found that the City had informally accommodated Ms. Mulvihill in the past because of her son's learning disability and Ms. Mulvihill had been repeatedly given opportunities to pursue a formal accommodation arrangement. Despite having been provided with the City's Duty to Accommodate Policy on October 12, 2004, reminded of it on October 28, 2004 and invited again in writing on November 5, 2004 to submit a request for accommodation, Ms. Mulvihill failed to [page302] respond to the City's good faith attempts to accommodate her needs. There is no evidence that Ms. Mulvihill needed or sought accommodation of her own medical condition. In any event, as the trial judge found, Ms. Mulvihill "appeared not to want to respond in any way to the accommodation that was being proposed by the [City]".

[68] What Wallace requires is an examination of the manner of dismissal, taking into consideration the full context of the employment relationship. I have already referred to the trial judge's key findings so will not repeat them. Suffice to say that there is nothing in those findings that supports a characterization of the City's conduct in the manner of dismissal as "bad faith conduct" or "unfair treatment". He made no finding that dismissal was done maliciously. In fact, the trial judge found that there was nothing in the City's conduct that could "be categorized as malicious, oppressive and high- handed". The evidence at trial does not support a finding that the City was untruthful, misleading or unduly insensitive in the manner in which it dismissed Mulvihill. On the contrary, the trial judge made numerous findings of fact that support the conclusion that the City was neither misleading nor insensitive in its dealings with Mulvihill. Even if the circumstances surrounding the manner of dismissal extend to include the City's conduct in investigating and dismissing Mulvihill's harassment complaint, the City acted fairly towards Mulvihill at all times and the trial judge made no adverse findings as to the City's conduct in that regard.

[69] In conclusion, in finding that the City made a mere "mistake" when it dismissed Ms. Mulvihill while she was on sick leave, and in the absence of evidence or findings of bad faith or unfair dealing, the trial judge erred in awarding Wallace damages.

Disposition

[70] Accordingly, I would allow the appeal and set aside para. 2 of the Judgment. In light of the result on appeal, the costs award below cannot stand. Thus, I would also set aside para. 4 of the Judgment. I would dismiss the cross-appeal.

[71] The City is entitled to its costs of the appeal and cross-appeal, should it seek them. If the parties are unable to agree on the matter of costs of the trial and appeal, they may make brief written submissions on the same. The appellant and respondent have 21 and 28 days, respectively, from the date of release of these reasons within which to file submissions.

Appeal allowed.

Notes

[^1]: As the City had already paid the equivalent of three months' salary, Ms. Mulvihill was awarded compensation for an additional one and a half months' salary.

[^2]: Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94.

[^3]: In testimony, Mr. O'Connor said "followed" rather than "official". It is unclear from the handwritten notes whether the word was "official" or "followed" but nothing turns on this.

[^4]: Keays v. Honda Canada Inc. (2006), 2006 33191 (ON CA), 82 O.R. (3d) 161, [2006] O.J. No. 3891 (C.A.), at para. 38, leave to appeal to S.C.C. granted [2006] S.C.C.A. No. 470.

[^5]: This court upheld a jury award of Wallace damages in Sommerard v. I.B.M. Canada Ltd., 2006 9581 (ON CA), [2006] O.J. No. 1209, 265 D.L.R. (4th) 484 (C.A.). In so doing, it approved of the trial judge's charge that a failed just-cause defence will not be punished if the allegations of cause were made in good faith. See also the following cases to the same effect: Laszczewski v. Aluminart Products Ltd., 2007 56493 (ON SC), [2007] O.J. No. 4991, 62 C.C.E.L. (3d) 305 (S.C.J.); MacMillan v. Brantpack Distributing Ltd., 2006 23262 (ON SC), [2006] O.J. No. 2796, 52 C.C.E.L. (3d) 125 (S.C.J.); Coupe v. Malone's Restaurant Ltd., 2006 BCSC 1350, [2006] B.C.J. No. 2045, 59 B.C.L.R. (4th) 353 (S.C.); Martell v. Ewos Canada Ltd., [2005] B.C.J. No. 60, 2005 BCSC 43; Linsdell v. Squamish W K Enterprises Inc., [2003] B.C.J. No. 249, 2003 BCSC 188; Porta v. Weyerhaeuser Canada Ltd., [2001] B.C.J. No. 2180, 2001 BCSC 1480; Daniel v. Survival Systems Ltd., 2000 NSSC 64, [2000] N.S.J. No. 349, 188 N.S.R. (2d) 259 (S.C.); Robinson v. Fraser Wharves Ltd., 2000 BCSC 199, [2000] B.C.J. No. 212, 5 C.C.E.L. (3d) 81 (S.C.); Havens v. John Watson Ltd. (c.o.b. "Watson Gloves"), [1999] B.C.J. No. 1201, 88 A.C.W.S. (3d) 597 (S.C.).