An Employee’s Duty of Good Faith and Honesty in Employment Contracts – Termination of Employment
Employment contracts are just like any other form of legally binding agreements, which are intended to set out the parties’ respective rights and obligations underpinning their relationship. But apart from what’s written in the employment contract, such as the services to be provided and prices agreed upon in exchange, do parties in an employment contract have “unwritten” (implied) obligations? In short, yes – they do.
In a recent case called C.M. Callow Inc. v. Zollinger, the Supreme Court of Canada once again affirmed a very important rule that applies in all contracts – the duty of all parties to act honestly and in good faith. As discussed below, this recent decision builds on a landmark case from 2014, Bhasin v. Hrynew (2014 SCC 71), where the Court found that a party’s failure to perform their contractual duties “honestly and reasonably and not capriciously or arbitrarily” could constitute a breach of contract.
As employment law is based on legal contracts between employers and employees, these requirements clearly apply. Simply put, an employment contract is what binds employers and employees in a legal relationship. When done properly, an employment contract determines the rights, responsibilities and rules that will govern the employment relationship, such as by including a termination clause that outlines the circumstances where the employer may termination employment. Therefore, this duty to perform contractual obligations “honestly” and to “act in good faith” apply in all employment contracts – both toward the employer and employee.
In this new Zollinger decision, the Court expanded the duty of honesty in contractual performance in an employment contract, including providing the types of conduct that will constitute a breach of the duty of good faith. Generally speaking, while a party in an employment contract does not have a positive obligation to disclose information relating to the contract, they are cannot:
- knowingly mislead the other party
- lie or tell half‑truths
- omit important information or remain silent in a way that misleads or deceives the other party
- fail to correct a misapprehension or misrepresentation
As the Court explained:
“The duty of honesty as contractual doctrine has a limiting function on the exercise of an otherwise complete and clear right since the duty, irrespective of the intention of the parties, applies to the performance of all contracts, and by extension, to all contractual obligations and rights…
No contractual right, including a termination right, can be exercised dishonestly and, as such, contrary to the requirements of good faith.”
How can we apply the duty to perform obligations in a contract “honestly” in the context of employment law? It would mean, for instance, that employers must always conduct themselves fairly and in good faith when carrying out or terminating a contract. So, while an employer is not required to tell an employee about an intention to terminate their employment, they cannot outright lie to an employee about the reasons why they decided to terminate their employment.
Similarly, if an employee mistakenly believes their employment was terminated for cause and are therefore not entitled to receive a severance package, the employer is legally required as part of their duty to act honestly and good faith to correct such mistaken belief, or false impression.
As the Court noted, “the question is not whether the contractual term was strictly adhered to, but whether it was performed honestly.”
While Zollinger described what it means for a party to act “honestly” when performing their obligations in an employment contract, the next issue is what does “act in good faith” mean? The Supreme Court of Canada also answered that last question in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, a decision it released at the same time as Zollinger. According to the Court, the duty of good faith requires a party to exercise contractual discretion “reasonably”, and not in a manner unrelated to the purposes for which it was granted. In fact, even if a contract provides one of the parties with unfettered (unlimited) discretion, they must still act in good faith.
How can we apply the “duty of good faith” in the context of employment law? It generally means that an employer cannot rely on a termination clause in employment contract as an excuse to allege termination for cause as a false pretext. For instance, it would prohibit an employer from terminating an employee by alleging “cause for termination” to cover up an unlawful retaliation (reprisal) or discrimination. If the employer were to unreasonably exercise their discretionary right to terminate employment for discriminatory reasons, it would constitute a breach of the duty of good faith and entitle the employee to additional damages beyond wrongful dismissal. As the Court noted:
“An unreasonable exercise of discretionary power is one that falls outside of the range of choices connected to this underlying contractual purpose, and is a breach of the duty of good faith.”
Conclusion
These new cases of Zollinger and Wastech raise significant practical implications for employers and employees when carrying out their respective obligations in an employment contract. Put simply, employers are under a clear obligation to always act fairly, honestly and in “good faith” when exercising their rights in an employment contract, such as whether to award bonus pay to the employee, or when making the decision to terminate employment (and especially the reasons it provides to the employee).
In fact, one could arguably go even further and argue that employers should not mislead an employee (or otherwise fail to correct a mistaken impression) that they are somehow not entitled to receive their annual bonus pay, severance package, or even whether they severance rights are limited to the minimum statutory entitlements to termination pay and severance pay under the Employment Standards Act, 2000, as opposed to much greater common law severance compensation. To do so could arguably constitute a breach of the employer’s duty of honest contractual performance and good faith.
Contact Employment Lawyer
If you are an employee whose employment was recently terminated in a wrongful dismissal, or an employer in the midst of organizational restructuring caused by the COVID-19 pandemic and need assistance with layoffs or employment terminations, call Bune Law at 647-822-5492 for guidance from an experienced employment lawyer.
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