With Great Power Comes Great Liability

Employers owe their employees a duty of good faith. Breaching that duty during a termination can lead to expansive liability, as the City of Toronto recently learned the hard way. The case of Headley v. City of Toronto involved an employee who was dismissed on allegations of theft and fraud. But the City’s conclusions were based on a sloppy investigation and the Court found they were unproven. In the result, the City had to pay the worker well in excess of what would normally follow a wrongful dismissal.

This article will:

  • summarize the mistakes the employer made in its investigation;
  • discuss how those mistakes lead to elevated damages, which could and should have been avoided; and
  • discuss an interesting interpretation the Court took of Wallace damages (a.k.a. moral damages), which is arguably contrary to other established case law.

Background and Investigation

The plaintiff, Mark Headley, was a long-term employee of Seaton House, Toronto’s largest shelter for homeless men, operated by the City of Toronto. The City terminated his employment on allegations that he stole money from Seaton House residents that was paid to him for the residents’ maintenance fees (i.e. a monthly fee in lieu of rent).

Mr. Headley’s troubles began when the Shelter discovered that on two occasions, he issued an informal receipt to a resident named Hinks indicating Mr. Hinks had paid his maintenance fee when he in fact had not. Mr. Hinks was a volatile individual and was in crisis at the relevant times, believing he would be evicted for being unable to pay his fees. Mr. Headley issued him the receipts to calm him down.

This discovery led to a wider investigation into missing maintenance fees. A broad review showed other receipts were missing, as well as some money. The review covered receipts issued by Mr. Headley and multiple other shift leaders.

After the investigation, the City concluded that Mr. Headley stole around $5,000 in maintenance fees. The City acknowledged that it had no direct evidence that Mr. Headley had taken the missing money but argued its circumstantial case met the burden of proof.

The Court’s Decision

A. Flawed Investigation

The Court found that the City’s allegations were unproven. The decision focuses especially on errors made in the investigation, including:

  • Some of the funds that the City initially thought were missing and blamed on Mr. Headley were in fact not missing at all (paras 44, 49, etc.).
  • The investigation focused unduly on Mr. Headley’s receipts to the exclusion of others. The investigators concluded without sufficient justification that other shift leaders were not missing money that was entrusted to them (paras 260, 334, 336, etc.). As such, the investigators did not consider other possible causes of the lost funds. Interestingly, the court noted that funds continued to go missing even after Mr. Headley’s termination (para 307).
  • The investigation was incomplete, omitting to adequately address important things, such as:
    • the possibility that other individuals took the money, which was stored in cash, unsecured in a location that various people had access to (paras 176, 270, etc.); and
    • that there was a lack of clear policy regarding how to receive maintenance fees and of safeguards to protect against theft (paras 36, 229, 301).
  • Mr. Headley was not given advanced notice of the allegations before being interviewed and so he did not have a fair chance to respond (paras 250, 254, etc.).

The tenor of the Court’s criticism was that the investigation and resulting conclusions were based on wrong assumptions, unsupported inferences and a general lack of care. The Court’s comments suggest an investigation intended to prove a conclusion (i.e. that the employee stole) rather than to answer a question (i.e. what happened to the money?). The failure to keep an open mind, without prejudging the issue, is essential to conducting an impartial investigation.

B. No Cause for Termination

The Court determined there was no cause for termination:

  • The inflammatory allegations of theft and fraud were unproven.
  • The alternative ground of cause, that Mr. Headley failed to comply with the Shelter’s policies in respect of receiving maintenance fees, was insufficient. The policies that existed lacked relevant details and were not disseminated to the extent that the employer suggested. And the actual practice among shift leaders was not uniform (paras 36-37).
  • Despite that it was misconduct for Mr. Headley to have given Mr. Hinks a receipt on the two occasions when Mr. Hinks did not actual pay his maintenance fee, the court held that did not justify a dismissal without notice (para 374).  Of note, the staff had discretion to waive or reduce clients’ maintenance fees, as sometimes was necessary if a client did not have money to pay or was robbed of their money (paras 73-75).

No cause being established, Mr. Headley was entitled to pay in lieu of 18 months’ notice of termination, amounting to $105,117. As of termination, he was 40 years old and had worked for the shelter for 15 years, most of that time in a management position (paras 377-81).

C. Wallace Damages

The City did not meet its obligation of good faith and fair dealing in the manner of Mr. Headley’s dismissal. It was not forthright with Mr. Headley in its investigation (para 392) and it was unduly harsh in termination. It acted on “unproven suspicions after an incomplete investigation, insensitively and unfairly conducted” (para 392). Having done so, the City opened itself up to Wallace Damages, also called moral damages.

Interestingly, the Court divided its discussion of Wallace damages into two categories:

  • Mental distress: the manner of termination caused mental distress, including impacting Mr. Headley’s sense of self-worth. The Court awarded $15,000 under this head.
  • Loss of income: The unfair allegations of theft, fraud and dishonesty, as well as the refusal to give a reference to prospective employers, cast a shadow over Mr. Headley’s job search after dismissal. The Court reasoned that this foreseeably led to tangible financial losses (para 402). As of trial, seven years after the termination, Mr. Headley had not been able to find a comparable managerial position. He was earning about half of what he made with the Shelter. The Court opined: “But for the unfairness in the manner of his termination, including the unfounded allegations of theft, fraud and dishonesty, I find Headley would have had little difficulty obtaining a comparable managerial position …” (para 404). Noting the need to avoid any duplication between this head and damages over the notice period, the Court order the City to pay an additional $50,000.

The extension of Wallace damages to financial losses sits ill at ease with other case law on point. For example, in Merrill Lynch Canada Inc. v. Soost the Alberta Court of Appeal overturned a trial judgment that awarded Wallace damages to a dismissed financial advisor in compensation for damages to his reputation, his book of business and the goodwill associated with his business as a result of termination, which would not have been compensable by an award of damages in lieu of notice of termination. The appellate Court held:  

… an employee with the usual contract of indefinite hiring has no right to keep the job, only a right to reasonable notice or pay in lieu (absent cause to dismiss). … Economic loss from being dismissed does not fall within Honda (i.e. Wallace) damages[.]

The Court in Mathieson v. Scotia Capital Inc. made a similar point:

… the damages claimed [by the plaintiff] are not intangible forms such as “mental distress” but are economic damages relating to loss of a job. … [The plaintiff’s] contract was for an indeterminate term and so the “reasonably contemplated” economic damages for any breach were limited to the common law Bardal notice period.  Keays and Wallace deal with additional damages for intangible injuries such as “mental distress”… [para 87]

It will be interesting to see if subsequent courts address the application of Wallace damages to economic loss, as favoured by the Court in Headley.

D. No Punitive Damages

Despite that the City’s actions were “unreasonable, insensitive, and unfair”, the Court found they were not “malicious.” It opted not to award additional punitive damages, indicating those should be “restricted to advertent wrongful acts that are so malicious and outrageous that they are deserving of punishment on their own” (para 408). 

Conclusion

Employers have immense power over their employees, which courts recognize. When companies are sloppy or act unfairly, even actions that are not malicious but merely ham-fisted can have devastating consequences for workers. That power creates responsibility, and potential liability, which courts enforce with financial consequences.

Disclaimer: This blog does not provide legal advice and should not be relied on as such advice. The articles here provide general information only. They cannot take the place of good counsel tailored to your situation. Articles are not updated after publication and may become outdated with changes in jurisprudence or legislation.

Matthew Tomm Law provides legal services in Calgary, Alberta, focusing on employment law and civil litigation.

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