Wrongful Dismissal Costs: Which Party "Won"?

The general rule of litigation costs in Canada is that the 'unsuccessful' party is presumptively required to contribute to the costs of the 'successful' party.

However, in complex litigation, often a party might be successful on some issues, and unsuccessful in others.  In cases where the result is 'divided', there is frequently a dispute as to the relative importance and complexity (and cost) of the different issues.

Still, the truest measure of which party was 'successful' has always been with reference to settlement positions.  While it is improper to advise the court of settlement positions prior to the court determining the merits, once the court has made its decision, it is normal and appropriate for the parties to tell the court what settlement positions they took before trial.

A recent decision of the Alberta Court of Queen's Bench reinforces the need for settlement offers.  In Richmond v. Panther Industries, a long-service salesperson sought pay in lieu of notice of termination.  There was no issue as to the termination itself, but there were disputes as to the length of the notice period (Panther said it should be 16 months; Richmond said it should be 20-24); as to whether or not Richmond had failed to mitigate his losses; and as to the amount of Richmond's pay in lieu of commissions through the notice period.

The Court found the reasonable notice period to be 18 months, reduced that for 2 months in respect of a failure to mitigate, and concluded that commissions should be calculated toward the low end of the available scale on the facts.  So it was a pretty good result for the employer, all things considered.

The employer sought costs, arguing that it was the more successful party, because - even though the ultimate damage award fell between the parties' most recent offers to settle, it was closer to the employer's last offer, and was more successful than the plaintiff on most issues.  Justice Kenny rejected that argument:  The Rules provide for consequences of formal offers, where the party obtains a more favourable result at trial than their offer, but an offer that falls short of that does not upset the default rule that a plaintiff who obtains judgment is entitled to costs.

If the Plaintiff had beaten his own offer, he would have been entitled to more costs.  He didn't.

On the other hand, had the Defendant put in a formal offer, the Plaintiff would have had to consider the risks of not taking that offer. As there was no formal offer from the Defendant, the Plaintiff decided to pursue the matter as he felt the informal offer was too low. In hindsight, he was correct.

As such, the Plaintiff obtained his Schedule C costs under the Rules.

The Lesson

This is the right decision.  Even though the plaintiff's settlement position was, itself, too high, the reality is that he had a claim that was worth pursuing, and the employer, having breached the contract, never put enough money on the table to satisfy those obligations.

Put simply, it was open to the employer to give the employee a choice to take his reasonable entitlements and walk away without a trial.  The employee never had that choice.  So while the employee could have put a more reasonable offer on the table himself, and would have obtained a more favourable award if he had (assuming the employer hadn't accepted it), the fact that he didn't merely leaves us with the default calculus.

Perhaps what's most surprising here is that the employer could be so successful on most of the issues, and not have beaten its own offer.  The decisions do not report the amount of the employer's informal offer, but this suggests that the employer did not offer much of a compromise over its 'best case scenario'.

Employers frequently leverage their relative 'deep pockets' against dismissed employees, hoping that employees will take low offers that amount to less than the employee's reasonable entitlements, rather than go through an expensive trial.  However, if employers want to leverage a threat of costs against the employee, they will have to put an offer on the table that is worth taking.

In the vast majority of wrongful dismissal actions, the question isn't about whether the employee is entitled to pay in lieu of notice, but about how much.  As such, in many cases, the possibility of cost consequences isn't something that a plaintiff necessarily has to worry much about until starting to see offers from the employer that the employer might reasonably beat at trial.

What Are Schedule C Costs?

While the general framework of "You get costs if you're successful; you get more costs if you beat your own offer" is pretty uniform across the country, the specifics vary by jurisdiction, and Schedule C is an Alberta-ism.  So out-of-Province lawyers might look at this and wonder what it is.

In Ontario, most costs awards go by 'partial indemnity' or 'substantial indemnity':  Beyond recoverable disbursements, legal fees are frequently 'fixed' by the court, based roughly on setting a partial indemnity or substantial indemnity 'rate' for the lawyer (usually approximately 60 or 90 percent of actual hourly rates, respectively), and looking at the actual number of hours spent by the lawyers.  (In fixing costs, Ontario courts will usually also other factors like the reasonableness of the number of hours, the 'stakes' of the proceeding, the complexity of the issues, etc.)

In Alberta, by contrast, while there is a residual discretion for the courts, most cost awards are set with reference to a 'schedule', with columns depending on the amount of money at stake, and specific sums designated for specific tasks.

In a straightforward proceeding, where the claim is between $50,000 and $150,000 with no requirement for unusual procedural applications, etc....if we assume a total of 2 days of Questioning and a 5 day trial, Schedule C costs would approach $18,000.  (By contrast, following a 5 day trial in the Ontario case of Chevalier v. Active Tire, the employer obtained a partial indemnity award of $50,000.)  For an interlocutory injunction application, you'd generally expect Schedule C costs of about $1500.  (In Ontario, I once obtained a partial indemnity costs award of $10,000 after succeeding on such a motion.)

Costs do two things:  They compensate a successful party; and they create risk of litigating issues.  In this sense, they're a bit of a double-edged sword.  Ontario-style cost consequences are great when we're talking about cases where one party took an unreasonable position, and limits the ability of frivolous processes to be used as a weapon.  And the risk of onerous cost penalties is a strong settlement incentive.  However, it also scares parties off of pursuing meritorious claims:  We can sue, and there's a chance of succeeding, but there's also a chance of losing, in which you'll still have to pay my fee, you'll get nothing for it, and you'll have to compensate the other side for their legal fees as well.

Having too low of a costs framework, however, has the inverse effect:  You have a meritorious claim, you can chase it, you have a strong chance of succeeding, but at the end of the day, even assuming that you win, obtain a judgment with a modest costs award, and collect on it, you won't likely come out ahead after paying my fee.

These concerns are both 'access to justice' issues.

Other Notes About This Case

The Reasonable Notice Analysis

Firstly, let's talk about the positions on the notice period:  It was a salesperson with over 21 years of service, who was 66 years old.  Both parties took ambitious positions, but I probably would have taken the same positions in either of their shoes.  18 months is probably at the low end of the range here, but I suspect that the parties could and should have settled there if that were the only issue.

However, the analysis used to get to that number is troubling.

Firstly, the employer pointed to papers by Barry Fisher as supporting a contention that the "starting point" should be 3 weeks per year of service for long-service employees.  While the citation isn't provided, the description of the paper makes me think that one is this one, from 1998.  (I'm pretty confident of this, because the court notes that it is based on 1600 cases, which corresponds to Fisher's wrongful dismissal database at the time of that paper.  This is the same paper cited by the Ontario Court of Appeal in Minott v. O'Shanter to utterly and completely reject the contention of any 'rule of thumb' at all for notice periods.)

The decision doesn't express any acceptance or rejection of this proposition, but there are difficulties with it.  While Fisher does suggest 'revised Rules of Thumb', drawing on statistical means for various categories of lengths of service, and adjusting them based on other factors, there are a number of problems with the employer's analysis.  Firstly, even Fisher is cautious about doing so in too simplistic a manner.  Secondly, the 'statistical means' cited in the paper are over two decades old, and the principles have changed materially.  (In the late 90s, non-managerial notice periods in Ontario were heavily suppressed by a decision in Cronk v. Canadian General Insurance, where the ONCA characterized 12 months as a cap for clerical workers, after the trial judge, Justice MacPherson, had questioned the importance of 'character of employment'.  However, since then, appellate courts around the country, including Ontario, have come around to Justice MacPherson's reasoning.)  Thirdly, courts have generally tended away from "Rule of Thumb" analyses, following Minott in viewing that as placing too much emphasis on length of service alone.  (Similarly, in Honda, the SCC cautioned against putting disproportionate weight on any one factor.)

Don't get me wrong:  I see what Fisher was trying to do with his proposal in that paper.  I've met Fisher; I've read his literature; I've used him as a mediator.  I respect his employment law acumen, and I was very interested and amused when he, my client, and opposing counsel got into a debate as to whether Toronto or Montreal had better bagels.  (True story.)  But his refined 'rule of thumb' approach has not gained traction with the judiciary, despite the greater predictability it would bring, because it puts too much weight on one factor, to the detriment of others.

Furthermore, the Court's treatment of the Plaintiff's advanced age is doubtful:

I am not satisfied that the notice period automatically goes up with age. In fact, the cases indicate otherwise. What is an important factor is that older workers, generally over the age of 55, are granted a longer notice period as it is more difficult to find alternate employment. Within that category however, the notice period does not go up with each year of an employee’s age.

This is a dubious proposition.  Age is typically treated as a spectrum, not a Boolean switch.  This is also inconsistent with the general principles.

In a 2015 paper in the Alberta Law Review, Severance Pay and the Older Worker, Professor Kenneth Thornicroft observed that courts routinely award older workers elevated notice periods, though it is impossible to assess how much of the notice period is because of their age.

Judges have justified older employees' longer notice periods for arguably legitimate and rational reasons (for example, employers will be reluctant to hire older workers because there would be fewer years to amortize training costs and employers will likely have to pay a higher wage, and may incur higher benefit costs) and for other less defensible reasons (for example, simple age discrimination or a desire to avoid an age discrimination claim if an older employee is hired but subsequently dismissed).  Some Canadian courts have declared that older, long serving employees have a moral claim to greater notice.  [Citations omitted.]

On none of these rationales does it make sense to say that a 55 year old should, all other things being equal, be treated differently from a 40 year old but the same as a 70 year old.

Mitigation

Failure to mitigate is a tough one:  It appears that the employee more-or-less 'gave up' after about 10 or 11 months.  However, the burden on employers to prove failure to mitigate is high:  They need to establish not only that the employee failed to act reasonably, but would have obtained mitigation earnings otherwise.  The employer's evidence included evidence about their own hiring (which the court rightly regarded as being of little use), and of a direct competitor hiring - though (and the decision doesn't highlight this) that occurred outside of the 18 month notice period.  (The way I read the decision, it seems like the judge took the information of the employer hiring for comparable positions [without expecting this employee to apply for those], and of one competitor hiring a comparable position, as suggesting general availability of replacement employment. However, with the competitor's hiring falling outside the reasonable notice period, I have serious reservations about that inference.)

The judge appears to have applied a probabilistic reasoning - effectively 'discounting' damages based on the probability that the employee would have obtained new employment with reasonable efforts.  This is not an uncommon approach, though one can question whether or not it accords with first principles.  However, under all the circumstances, it is surprising that no mention of the impact of the plaintiff's advanced age was made in that context:  Just because work in that field may have been available, the supposition that employees who were looking would have hired a 67-year-old seems at least a little bit challenging.

Two things are generally true of long-service employees in their 60s:  Firstly, they frequently don't want to start a new job - even the ones who would have been happy working until age 75 in their existing role don't want to have to adjust to a new workplace, so the reaction of "I guess I'll just retire" is a common instinct, though yes, that makes a wrongful dismissal action difficult.  Secondly, though, new employers often don't want to hire them.  This is a factor both for the assessment of the reasonable notice period, and for evaluating re-employability for the purpose of failure to mitigate.

Commissions

The issue on commissions was one of calculation:  In past years, the plaintiff had obtained commissions on the scale of about $12,000 per month.  But for the period of a little more than a year prior to dismissal, his commissions were down to about $5000 per month on average - possibly contributed to by health issues he experienced, as well as broader economic circumstances.

His replacement, after a period of adjustment, tended to earn about $5000 per month in commissions.

Based on the circumstances, the judge concluded that, had he been employed through the reasonable notice period, his commissions would have continued to be approximately $5200 per month.  While there is case law that averages the past x years (often three, sometimes more, sometimes fewer), when there are upward or downward trends, the court may accept that the changed circumstances would have continued to apply through the notice period.  Alternatively, the court could accept that a particular year is an outlier because of specific circumstances not relevant to the reasonable notice period, and give less weight to it.  It's fundamentally a factual analysis.

I question the appropriateness of looking to his replacement's earnings to determine what he would have made:  He was in the role for over two decades, and one might reasonably expect a newcomer to the role to be less productive than him.  In any scenario where a variable component is based on individual performance, the natural presumption would be against assuming that one individual's compensation is indicative of another's.

I might also suggest that there appears to be a 'weighting' issue in the decision:  The trial judge speaks about average earnings over three different calendar years, being 2014-2016, though 2015 is an extrapolated figure based on him working only 9 months (due to health reasons) and 2016 is an extrapolated figure based on him working for only 2 months (prior to termination).  In 2014, he averaged nearly $12,000 per month in commissions.  In 2015 and 2016, the average ranged from $5190 to $5377; his replacement averaged a little under $5000.

So while the judge acknowledges that the medical absence may have impacted his earnings, she appears to have based her conclusion on the broad consistency between the last two years - even though it only accounted for 11 non-consecutive months - and the replacement's earnings, to essentially ignore that these 11 months were an outlier in terms of his historical earnings.

But while it's otherwise difficult to take issue with the finding that the depressed earnings flowed from a general industrial downturn which would have persisted through the reasonable notice period, that is a finding that ought to have influenced other calculations, like the length of the reasonable notice period itself and/or the likelihood that he would have found replacement employment but for his failure to mitigate.  Instead, on the mitigation issue, the judge concluded that "positions were starting to be available."

Calculating damages in respect of variable compensation entitlements is usually not an exact science, but the surrounding factual circumstances need to be regarded with consistency:  To award pay in lieu of commission on a drastically reduced scale on the basis of a broader economic downturn, while simultaneously awarding a notice period at the low end of the range and then discounting it based on a finding that he would have been able to find work...basically allows the employer to have its cake and eat it too.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.