Mental Distress and Punitive Damages - Employer Liabilities

EP Update - November 13, 2006

Two recent court decisions suggest that mental distress and punitive damages claims by employees against employers will become more common. These cases point to the importance of addressing disability issues in the workplace carefully and of obtaining advice before embarking upon courses of action that may give rise to significant risks of substantial liability.

Case # 1- Keays v. Honda Canada Inc. (Ontario Court of Appeal)

The Ontario Court of Appeal recently upheld (although reduced the amount of) a substantial punitive damages award against Honda Canada for having wrongfully terminated a 14-year employee after having failed to reasonably accommodate his disability.

THE FACTS

The Plaintiff (Keays) went on disability leave in 1996 due to Chronic Fatigue Syndrome. In 1998, Honda's disability insurer determined he was sufficiently fit to return and therefore, terminated his benefits. Keays came back to work, but under protest by him and his doctor.

Keays' ongoing intermittent absences resulted in a written disciplinary warning. Although Honda accommodated his absences, it required him to obtain a doctor’s certificate validating each one before allowing him to return to work. Keays repeatedly requested that Honda drop this requirement, but it refused. He retained legal counsel who wrote to Honda outlining Keays's concerns, but Honda did not respond. Rather, Keays was required to meet with Honda personnel who requested that he submit to an assessment by a doctor retained by the company. On the advice of his lawyer, Keays refused until Honda clarified the purpose, methodology and parameters of the assessment. Honda replied by advising Keays he would be terminated if he did not cooperate. Keays refused to see the doctor, resulting in his termination for insubordination.

THE TRIAL JUDGMENT

A lengthy trial culminated in Honda being found to have terminated Keays without just cause. 15 months was fixed as the period of reasonable notice and 9 additional months were awarded as Wallace damages to compensate for the manner of the dismissal. Most significantly, a further $500,000 in punitive damages was awarded for what was characterized as Honda's discriminatory and harassing conduct contrary to the Ontario Human Rights Code (the "Code").

THE APPEAL JUDGMENT

The Court of Appeal agreed that the termination had been without just cause and upheld the award of 15 months notice plus 9 months Wallace damages. As for punitive damages, the Court agreed they were warranted, but felt that $500,000 was excessive. It therefore reduced this award to $100,000. Despite this reduction, the Court used very strong terms to describe Honda's conduct, agreeing that it was both "malicious" and "high-handed". It held that Honda's intent had been to intimidate and eventually terminate Keays in order to deprive him of his right to reasonable accommodation, that Honda was aware of its obligation under the Code to accommodate him, that it knew Keays depended upon his employment for disability benefits and that it was aware he was vulnerable due to his medical condition.

Case #2 - Fidler v. Sun Life Insurance Co. (Supreme Court of Canada)

In June 2006, the Supreme Court upheld an award of damages for mental distress arising from the breach of a "peace of mind" contract. The decision pertained to a claim under a long-term disability ("LTD") insurance policy. Although the dispute was with an insurer as opposed to an employer, the Court's analysis suggests that this decision may have important implications for employers who have contracted to provide sick leave/disability benefits to their employees.

THE FACTS

The Plaintiff, Connie Fidler, suffered from Chronic Fatigue Syndrome and Fibromyalgia. Under her group insurance plan with Sun Life, she was considered "totally disabled" and, thus entitled to LTD benefits. However, after a period of time, and despite medical evidence that she remained disabled, Fidler's benefits were terminated by Sun Life based on its own video surveillance showing her engaged in routine daily activities (i.e. driving, shopping, etc).

Fidler sued Sun Life for breach of contract and also sought mental distress and punitive damages. Prior to trial, Sun Life voluntarily reinstated her benefits and paid all arrears with interest. The subsequent trial dealt exclusively with the mental distress and punitive damages claims.

DAMAGES FOR MENTAL DISTRESS

Although the Supreme Court found that Sun Life had not acted in bad faith merely by denying the insurance claim (and that punitive damages therefore were not warranted), it ruled that Fidler was entitled to $20,000 in mental distress damages to compensate for her mental suffering. The Court held that a contract for disability benefits is a peace of mind contract that secures a psychological benefit, which if breached may cause mental distress sufficient to warrant compensation. The Court concluded that Fidler had genuinely suffered considerable mental distress and discomfort arising out of the loss of her disability benefits.

IMPLICATIONS OF THESE CASES FOR EMPLOYERS

The $100,000.00 punitive damages award in Keays remains one of the largest ever in Canada. As well, the fact that such damages were awarded in relation to conduct that breached the duty to accommodate under the Code is significant - employers now face a heightened risk of monetary awards that are much more substantial than the $10,000 general damages limit under the Code.

However, it is important not to interpret Keays as prohibiting employers from dealing effectively with absences, disability and accommodation issues. Rather, the message to take from Keays is that more than ever, employers must address disability and accommodation issues with care and in a manner which achieves a balance between the respective rights of employers and employees.

As for Fidler, it suggests that employers may find themselves facing more frequently mental distress claims by employees whose disability benefits are either cut off after a period of time or denied at the outset. Employers who have contractually obligated themselves (perhaps unwittingly) to provide sick leave coverage or disability benefits to their employees must take care when considering whether to deny such benefits, especially where the information concerning the extent of the disability is contradictory. The risk is that the denial of a disability benefit by an employer may give rise to liability for mental distress damages on the grounds that the employer has breached its obligations under a so-called "peace of mind" contract.

Again, this is not to suggest that Fidler ought to be interpreted as leaving employers with no recourse when dealing with disability and accommodation issues. Rather, it underlines the importance of employers approaching disability issues carefully, having due regard for the potential risks and seeking advice before embarking upon a potentially risky course of action. By doing so, the risks created by Fidler as well as Keays can be managed in a reasonable manner.