Calculating Wrongful Dismissal Damages

Before terminating an employee, the employer is well advised to consider the types of compensation provided to the employee and structure any termination package to reflect that employee’s potential loss, as the dismissed employee will be able to bring a lawsuit for loss of their salary and other pecuniary losses that flow from their notice period in any subsequent judicial proceeding.

In a wrongful dismissal action, the employee has the onus of establishing that they are entitled to a particular form of compensation during the notice period and establishing the financial value of their damages. Mitigation income and collateral benefits may be deducted from wrongful dismissal damages.

Wrongful dismissal damages are generally calculated from the date of the employer’s breach of the employment contract (i.e. the date that employment was terminated without proper notice, pay in lieu or other termination entitlements).  In a constructive dismissal context, this means that damages are assessed going forward from the date the employer fundamentally breached the employment contract, not from a later date such as when the employee resigns in response to the breach. For this reason, later events that might have eliminated the employee’s termination entitlements, such as the revocation of a license to perform key job duties, will have no bearing on calculation of damages. Some exceptions to this rule are made where fairness or the facts of the dismissal require.

Reasonable Notice is a Normally Two Step Calculation

An employer who dismisses an employee without just cause is obliged to provide the employee with reasonable notice of the termination of their employment. There are normally, in most circumstances, two steps to determine the employer’s potential liability for reasonable notice:

Step 1 – Determine the period of reasonable notice – i.e. how how will the employer be paying severance for?
Step 2 – Calculate the employee’s damages based upon the reasonable notice period.

To determine the financial value of the employee’s loss, a court will normally break the employee’s compensation and benefits down to a monthly or weekly figure, and then multiply this value by the months or weeks of reasonable notice. The court will award an amount that most accurately reflects what the employee would have earned over the applicable notice period. Lately, our Wrongful Dismissal Lawyers have been noticing that many employers now prefer to calculate severance in weeks, rather than months.

Various methods are used to calculate loss of salary during the notice period. The general rule is that the employee’s salary should not really be averaged and should reflect the employee’s income at the time of dismissal.  Normally a court will consider the salary level earned by the employee at the date of termination. The court will typically reference the employee’s Income Tax T4 form to establish their fixed salary. The court may also consider the employee’s pay slips or the terms of any offer letter.  If this figure does not represent the employee’s actual income, the court may average the salary loss based upon the employee’s prior salary history.

What if my salary fluctuates? 

Where the employee’s salary fluctuates, an average income is calculated based on the employee’s prior history. Some courts have looked back as far as five years. There is no express rationale for how far back the court will go to determine the average salary. They do, however, seem to avoid a comparison to prior years where the salary earned was lower.

What if I made tips? How are tips dealt with in severance calculations?

Even though the employer may not have provided the employee with tips or gratuities during the course of their employment, the employer may still be liable for the employee’s loss of tips and gratuities during the notice period.  The value of these damages may be difficult to predict as the employer does not have a record of the employee’s gratuities and quite often the employee has not kept record of the amount of gratuities earned during their employment, or the employee does not declare the full amount of their gratuities on their income tax return.  If the court accepts the employee’s evidence that they earned gratuities and the employee has no record of the actual value, the court may estimate the amount of damages on the basis of the employee’s evidence about the past history of their tips or gratuities. If the tips are not reported the full amount of gratuities to Revenue Canada, the court may either disregard the amount claimed on their income tax return and award another estimated amount or draw a negative inference on the employee’s credibility and substitute what it considers a reasonable amount for tips.

How is my commission dealt with in severance calculations?

Where an employee is compensated solely or in part by commission, they will be entitled to damages for loss of their commission during the notice period. The employee is not entitled to projected commissions beyond the reasonable notice period, unless these damages are specifically provided for in their employment contract.

How would my bonuses be dealt with during severance calculations?

In most cases, the employee may be entitled to damages for loss of bonus during the notice period. The right to a bonus may be created at the time of hiring, through a bonus policy, or as a result of commitments made to the employee through the term of their employment.  Assessing bonus compensation normally begins with a determination of whether the employee has a right to such damages. This is normally a two step analysis:

Step 1 – We determine the employee’s common law right to damages for breach of contract by reviewing the employment contract or relevant bonus plan. The employee must establish that a bonus would have been earned during the notice period, and thus the employee is entitled to damages for loss of that bonus. This bonus may either be non-discretionary in nature or discretionary but integral to the employee’s compensation and;

Step 2 – Determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee’s common law rights.

A discretionary bonus is determined by the employer, without the strict obligation to consider or weigh particular criteria or factors. In general, the employee cannot recoup damages for loss of a discretionary bonus. A discretionary bonus is considered to be a “gift” or “gratuitous payment” that is not required under the employment contract.

A non-discretionary bonus, on the other hand, is a bonus that must be paid if conditions in the employment contract or bonus plan are met (for example, the bonus might be a specified percentage of an employee’s annual salary to be paid if the employee meets a pre-determined sales target). To receive damages for loss of a non-discretionary bonus the employee must establish both:

• Contractual eligibility for a bonus.
• Entitlement to the bonus because the criteria or conditions precedent for the bonus payment were met.

How are automobile benefits dealt with during severance calculation?

The employee may be able to claim for loss of automobile benefits during the notice period. The primary considerations in determining if the employee is entitled to damages for loss of automobile benefits are:

• The terms of the employment contract, and
• Whether the vehicle was provided for personal or business usage.

If the employee uses the car primarily for their own benefit and only incidentally uses it for employment purposes, then they should be compensated for the value during the period of reasonable notice. Alternatively, if the employer supplies a car in order to allow the employee to carry out their job responsibilities (for example, sales staff required to travel to customers), then the employee should only be compensated to the extent that they put the car to personal use.

If you have a company car, you cannot refuse to return it when your employment is terminated. You are not entitled to possession of a company car until the “trial” of your wrongful dismissal action, rather they should seek damages for loss of this benefit.  Damages for loss of a company car have been valued in different ways.

The court may assess damages based upon personal benefit claimed for income tax purposes.  The court may assess the employee’s damages based upon the value that the employee has claimed as their personal benefit for income tax purposes.  A court may also assess damages based upon personal use percentage.  The court may determine how much personal use the employee had of the company car and attribute that percentage to the cost of the vehicle (typically, the employer’s lease cost or the replacement cost) over the notice period.

What does mitigation mean and how does it apply to my severance?

Remember – where an employer wrongfully dismisses an employee (a termination without just cause and without reasonable notice), absent an enforceable contractual term to the contrary, the employer is required to pay damages to the employee in lieu of common law reasonable notice.  That being said – if you file suit for wrongful dismissal against your former employer, you do have the obligation to take reasonable steps in mitigation, in your own interest, to maintain your income and your position in your trade or profession, but you will not be held to a standard of perfection.

That being said, you don’t have to rush out and look for alternate employment the day after you get fired. You are allowed a reasonable period of time after your termination to get over the shock of dismissal and to prepare for a job search. You is not expected to begin submitting job applications the day after your termination.  In fact, some courts may even find that an employee is not required to accept an offer of employment for a short period after termination. For example, an unproven assertion of just cause may cause stress, depression or a lack of confidence that interferes with an employee’s ability to accept a new position.   But remember, there is a limit after which an employee is expected to begin a job search, despite the shock of dismissal. One court (Samuel v. Benson) rejected an employee’s assertion that shock and distress prevented her from searching for a new job for a period of four months. The court noted there was no medical evidence to support a period of this length.

If you’ve been terminated, we can help.

Matt Lalande is a Hamilton Employment Lawyer who has been representing terminated professionals, executives and employees across Ontario since 2003. If you’ve been terminated it’s important that you do not sign any separation papers or separation packages before having them reviewed by a qualified employment lawyer. Contact us province-wide at 1-844-LALANDE or local in the Hamilton/GTA at 905-333-8888. Contact us 24/7 with any questions that you may have.

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LALANDE PERSONAL INJURY LAWYERS  – HAMILTON OFFICE
1 King Street East, Suite 1705
Hamilton, On L8P 1A4
Local: 905-333-8888
Toll Free: 1-844-LALANDE

*The above information was approved by Matt Lalande or another lawyer at Lalande Personal Injury Lawyers. The information comes from legal experience, trial experience, extensive medical research and discussion with medical professionals, medical journal review and updates and/or consultations with fellow friends and colleagues in the legal and medical field.