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Does Your Employer Owe You A Duty of Good Faith?
Employment Law

Does Your Employer Owe You A Duty of Good Faith?

Matthews v Ocean Nutrition Canada Ltd is a landmark employment law case that was heard by the Supreme Court of Canada in January 2020. David Matthews worked for Ocean Nutrition from 1997 to 2011. In June 2011, he sued Ocean Nutrition for wrongful dismissal damages, including the loss of a Long-Term Incentive Plan (the “Plan”), which had been paid to him by the company regularly throughout his employment. The Plan provided that, if the company was sold while Matthews was employed by it, he was entitled to receive a portion of the sale proceeds based on the formula contained in the Plan. He was wrongfully dismissed prior to the sale of the company. The trial judge awarded Matthews damages to compensate the 15-month reasonable notice period to which he was entitled, meaning he would have been employed at the time of the sale had he not been wrongfully dismissed.

One of the central questions in all three levels of court was whether Matthews was entitled to damages pursuant to the Long-Term Incentive Plan. During the trial, the Supreme Court mainly wrestled with the question of whether terminated employees are entitled to bonuses during their common law reasonable notice periods. In the Nova Scotia Court of Appeal decision, the employer’s good faith duty to the employee was also at issue. Specifically, Justice Scanlan reasoned in his dissent that the employer had a good faith obligation beyond the manner of dismissal. Two intervenors in the Supreme Court hearing alluded to Justice Scanlan’s dissent to argue that the Court should now recognize a general employer duty of good faith during the employment relationship. Accordingly, though the Supreme Court’s decision has not yet been released, many anticipate that it will have far-reaching consequences, since the question of good faith in employment contracts may finally be recognized.

Many duties are implied terms of contracts. They exist as a matter of law, and the parties cannot alter them at their discretion. The implied term of good faith (and fair dealing) is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith.

At common law (law that is articulated by judges), employers owe several duties to their employees, including a duty to provide notice of termination and a duty of fairness. Though these duties go a long way to ensure that employees are treated with dignity and respect, employers do not maintain any official legal duty to perform their general obligations to employees in good faith. Judges have been reluctant to add a general duty of good faith to the list of duties owed by employers to their employees, mainly because it is believed that it would be overly intrusive and may limit an employer’s ability to manage the workplace effectively.

One of the most prominent cases articulating this is Wallace v. United Grain Growers Ltd., where the Supreme Court of Canada rejected an implied duty in contract as the basis for holding employers to an obligation of good faith and fair dealing throughout the length of the employment relationship. The Court reasoned that the law had evolved to permit recognition of an implied duty of good faith only in termination of the employment.

Accordingly, employers were held accountable for bad faith conduct in the behaviour leading up to termination as “another factor” in determining the employee’s reasonable notice period. Ultimately, Honda Canada Inc. v. Keays, ended the Wallace approach of artificially extending the notice period for bad faith conduct in the manner of termination. Instead, the Court held these damages were to be awarded in keeping with the infamous Hadley v. Baxendale principle: damages are recoverable for a contractual breach if they are “supposed to have been in the contemplation of both parties.” Damages caused by the manner of termination are now remedied by mental distress damages when actual harm can be demonstrated.

In contrast, implied in every contract, as a matter of legal obligation for employees, is a general duty of good faith and fidelity. The essence of this duty is the requirement that an employee act honestly and faithfully during the term of employment. This means that an employee must always put the employer’s best interests first and avoid conflicts of interest.

If the Supreme Court finally articulates a duty of good faith on the part of employers beyond the manner of dismissal, the Matthews v Ocean Nutrition Canada Ltd case may well have lasting reverberations on employment relationships for years to come. Such a duty would add much needed reciprocation and would help level the playing field in favour of less powerful employees, especially in non-unionized settings.

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