The Purpose of Moral Damages
Moral damages are awarded to compensate a dismissed employee for mental distress that has been caused by the bad faith manner by which they were dismissed by their employer. Moral damages will not be awarded to compensate a dismissed employee for mental distress suffered as a result the dismissal itself, even if the decision to dismiss the employee was unfair.
The Supreme Court of Canada stated in Honda Canada Inc. v. Keays.1 that an award of moral damages is based on the principle, articulated in Hadley v. Baxendale,2 that damages are recoverable for a contractual breach if the damages are “such as may fairly and reasonably be considered either arising naturally . . . from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties”. Bastarache J. wrote at para. 56 of Honda Canada:
We must therefore begin by asking what was contemplated by the parties at the time of the formation of the contract, or, as stated in para. 44 of [Fidler v. Sun Life Assurance Co. of Canada,  2 S.C.R. 3, 2006 SCC 30]: “[W]hat did the contract promise?” The contract of employment is, by its very terms, subject to cancellation on notice or subject to payment of damages in lieu of notice without regard to the ordinary psychological impact of that decision. At the time the contract was formed, there would not ordinarily be contemplation of psychological damage resulting from the dismissal since the dismissal is a clear legal possibility. The normal distress and hurt feelings resulting from dismissal are not compensable.
Damages resulting from the manner of dismissal must then be available only if the employer has engaged in conduct during the course of dismissal that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive”.3
Prior to 2008 courts in Canada followed the Supreme Court of Canada’s decision in Wallace v. United Grain Growers Ltd.4 and simply extend the dismissed employee’s notice period of it where found that the employer had engaged in acts of bad faith at the time of dismissal. This type of damage award was commonly referred to as “Wallace damages”.
However, in 2008 in Honda Canada the Supreme Court of Canada made significant changes to the way damages for bad faith dismissal are awarded. The types of bad faith employer conduct that will possibly attract a moral damage award remained unchanged. However, the Court altered the analytical approach followed by courts when determining how moral damages will be assessed. Damages for bad faith dismissal (a.k.a moral damages) are no longer be awarded by an arbitrary extension of the notice period. Instead, moral damages will only be awarded for quantifiable mental distress if it was reasonably foreseeable that the employee would suffer mental distress from the manner in which the employer dismissed the employee. The damage award is an amount determined by the court to reflect the actual mental distress suffered by the dismissed employee. The Court was clear that a dismissed employee is not entitled to damages for the “normal distress and hurt feelings” resulting from the termination of employment.
The requirement that an employee must prove that he or she suffered compensable mental distress as a result of the employer’s bad faith conduct at the time of dismissal has made it more difficult for dismissed employee’s to successfully claim moral damages. Even in cases where the employer has engaged in conduct that the court found breached the employer’s obligation of good faith and fair dealing, dismissed employees have been denied moral damage awards if they have been unable to provide sufficient evidence that they suffered from mental distress as a result.5