Employer liable for punitive damages for failing to pay out employee

Employee compensation is a fundamental aspect of employment law, both during and after employment. Employers must properly pay out any wages, salaries, commissions, or benefits validly owed to the employee.

It is critical for employers to carefully consider the terms of the employment agreement when terminating an employee. Otherwise, by failing to pay out all entitlements owed to the employee, the employer may face liability for wrongful dismissal grounded on a breach of the employment contract. Depending on the employer’s conduct, they may also be ordered to pay punitive damages, as in the 2023 Ontario case of Giacomodonato v. PearTree Securities Inc.

The termination clause is one of the most essential parts of an employment agreement. It is important to note that employers cannot contract outside of the minimum employment law standards set by legislation. Upon termination, the employee must at least receive the minimum compensation set out in the Employment Standards Act. In some cases, if a termination clause is too broad or ambiguous, the termination clause may be invalid and, therefore, unenforceable. Due to this, it is crucial to consider the termination clause carefully.

Under the terms of an employment contract, the employee may also be entitled to compensation beyond their salary, such as commission, bonuses, or overtime pay. These forms of compensation are usually set out in the employment contract, and it is vital to have clear terms on when these entitlements are available and how they are calculated. If there are any changes to the bonus or commission structure, it is often helpful to have this set out in writing in case of any dispute. If the matter moves to court, the judge will look to the employment contract terms to make its determination.

Compensation during notice period

Employees are entitled to a notice period or pay in lieu when terminated. During the notice period, employees may be entitled to compensation other than salary, such as benefits, commissions, or bonuses. For example, under the Employment Standards Act, 2000 in Ontario, employees are entitled to stay on their employer’s benefits plan during the notice period. Benefits can include medical and dental, disability coverage, pension and RRSP contributions, life insurance, vacation pay and more. If the employee’s plan is cancelled before the end of their notice period, the employer will need to cover the cost based on the employee’s duration of entitlement.

Employees may be entitled to other compensation, such as bonuses and commissions, unless excluded under the terms of the employment contract. Also, depending on the employment contract, the employee may be entitled to additional severance pay beyond the reasonable notice period if they meet the criteria set out in the contract.

When are punitive damages available for wrongful dismissal?

Punitive damages are only available in very limited circumstances. They are most commonly awarded in exceptional cases where malicious, oppressive, or high-handed conduct warrants punishment based on the court’s assessment. The misconduct in question must significantly depart from ordinary standards of reasonable behaviour. In particular, the conduct may be described as harsh, vindictive, reprehensible, or malicious.

It is not enough to find that the employee was successful in their claim. Punitive damages are available only if there is an independent actionable wrong, including the employer's breach of their implied duty of good faith and fair dealing. For example, an employer may be liable for punitive damages because of a failure to comply with employment standards legislation if the court determines their conduct warrants it.

$10,000 in punitive damages

In Giacomodonato v. PearTree Securities Inc., the Ontario Superior Court of Justice ordered the defendant employer to pay $10,000 in punitive damages for failing to pay amounts owing to its past employee. The employer terminated the employee without notice in January 2018. However, at that time, the employer knew it still owed the employee significant compensation from July 2016 to July 2017. There was also a second employment contract under which the employee was entitled to additional compensation.

Shortly after being terminated, the employee was asked to sign a certificate stating that he had not breached his restrictive covenants involving non-competition. However, the employee was not required to do so under any terms of the employment contracts and he refused to sign. The employer concluded that the employee must have breached their covenants despite there being no evidence.

A few months later, the employer advised via letter that it would not continue paying the employee’s salary continuation payments under the second employment contract. In the letter, the employer set off the money owed against the money already paid. Also, the letter included a cheque with a term that the employee would give up all his entitlements to the amounts owed if he deposited the cheque. The employer explained that its actions were based on the employee’s refusal to sign the certificate.

No basis for withholding compensation owed

The court found no basis for the employer to take these steps in withholding or setting off amounts owed to the employee. It held the employer abused its position of power and awarded the employee $10,000 in punitive damages.

As the Giacomodonato case demonstrates, employers can face significant damage awards for failing to pay all entitlements owed to an employee at the time of termination. The case serves as a reminder that this risk can be mitigated by careful review of the employment contract and all compensation earned and owing to the employee before dismissal steps are taken. This review can help employers ensure they do not face unnecessary litigation or punitive damage awards down the road.

Paulette Haynes is the founder of Haynes Law Firm, a boutique employment law firm in Toronto.