The Importance of Investigations: Employer Fails to Prove Just Cause

Pop quiz:  You're the General Manager, and you receive a report that a long-term supervisor, with no disciplinary record, was overheard making anti-Semitic remarks about the company's owner.

What should you do?

There's an interesting case, decided last week by the Ontario Superior Court of Justice, which fundamentally illustrates the importance of a meaningful investigation by management.  The case is Ludchen v. Stelcrete Industries Ltd.

The Facts

The fact pattern here is slightly unusual.  Richard Ludchen worked at a Stelcrete's plant in Welland for about 11 years, and was a welding supervisor for most of that time.  Stelcrete is a closely held family company.

In January 2008, shortly after the introduction of the "Family Day" holiday, Stelcrete exercised an option available to it that year to not provide a paid holiday on Family Day and instead provide an extra day off at Christmas.  Ludchen was instructed to post an announcement to that effect.

It was alleged that, when doing so, Ludchen loudly made an anti-Semitic remark about the company's owners.

The allegation came to management through an unusual source:  There was a Private Investigator, named Stacey, in the workplace, tasked with investigating drug use by certain employees.  She was undercover as an ergonomics expert.  Stacey had not heard the remark herself, but said that she had heard it reported to her by several employees.

Stacey reported this information to the HR Manager, Dietsch, and the General Manager, Nichols.  They consulted with one of the owners, and decided to terminate Ludchen for cause.  They met with Ludchen, told him that he was alleged to have made an anti-Semitic remark (he was never told the specifics of the allegation, and his evidence was that he didn't know what "anti-Semitic" meant), and terminated him on a 'for cause' basis.  After the termination, Ludchen had called Dietsch, offering to apologize if that would help.

I note, in passing, that there's little strictly wrong with management's approach.  If one assumes that they were able to prove the allegations, then there would have been a reasonably strong case for cause, and the failure to properly investigate, and the failure to actually specify the allegations against Ludchen, would likely not be misconduct in the strictest sense.  (Some question about the duty of good faith and fair dealing, perhaps, but in a termination where just cause is established, that won't likely matter.)

If you can't prove the allegations, however...

At Trial

The judge found Dietsch and Nichols to be reasonably credible and forthright witnesses.  He did, however, call out Dietsch's failure to properly investigate:

[38]          My greatest criticism of Dietsch was the fact that, as the Manager of Human Resources, she had received a very serious allegation about Ludchen’s misconduct, and she chose to not conduct any investigation into the truth of the allegation. She did not arrange to speak with any of the men who had apparently heard the remarks; she did not tell Ludchen what he was alleged to have said; and she did not ask Ludchen if he had made any anti-Semitic remarks.

[39]           The case law as to the extent of an employer’s duty to investigate is unclear, but from a practical perspective, the failure of an employer to conduct an investigation into a serious allegation makes it difficult for an employer to later prove the allegation in a courtroom, as is obvious in the present case.

You see, neither Dietsch nor Nichols could provide any firsthand evidence as to Ludchen's alleged misconduct.  So the fact that they are believed...doesn't really matter.

The judge had some reservations about Ludchen's credibility.  Ludchen's story was that he had expressed some dissatisfaction with management's decision to not give Family Day off, but that it was more nuanced - certain employees had come to him expressing concerns, and he basically said that he shared their concerns and didn't like the decision either, but the company was generally a great company to work for nonetheless.  He claimed that this approach was the result of a leadership course he had taken, which the judge considered doubtful.  (Indeed, that's actually a really bad approach for a front-line supervisor.  However, if true, it alone would be a far cry from just cause.)

However, the judge was highly critical of Stacey's evidence.  He found her to be evasive and argumentative, and then - at points - surprisingly specific including direct quotations of what people had purportedly said to her five years prior, without any reference to notes.  Indeed, even the exact words of the anti-Semitic slur at the centre of the case had changed.  She gave one set of exact words to management at the time, and at trial insisted that it was otherwise.  And her story also conflicted with management's in other material ways - she insisted that she went to management on the day of the incident; both Dietsch and Nichols testified that it was a week later.

At trial, Stacey's evidence was that "everyone on the shift" had heard Ludchen's remarks.  As the judge highlighted, this is an inherently suspect remark, and moreso when you bear in mind that nobody else corroborated it.  (Recall my remarks last week about people claiming third-party corroboration to bolster credibility?  To lawyers and judges, it reeks.  Indeed, not only does "Everybody heard it" send off alarm bells, but it also raises an expectation that there should be other people taking the stand to say so.)

Stacey didn't give more detailed information to the employer until several months later, likely after litigation had commenced or become apparent, providing the names of five employees who she said heard the remark.  None of them corroborated her story, and in fact two of them testified that they had never heard Ludchen make any anti-Semitic remarks.  When asked on the witness stand to list the employees who heard the remarks, she provided a list of six names, only two of which had appeared on the previous list.

A few months before trial, Stacey provided further information to the employer claiming that she had heard Ludchen make anti-Semitic remarks on various other occasions, as well.  The employer then amended its defence to reflect that.  But it raises some pretty serious credibility problems - why is Stacey only saying this now?

So Stacey's evidence is mostly hearsay in the first place, and extremely unreliable altogether.

The only other person who testified that he heard Ludchen say anything anti-Semitic was another supervisor, Burns, from a different part of the plant, who happened to be in the area at the time.  His evidence of what Ludchen said is very different from Stacey's evidence on the point, being far less egregious (still highly inappropriate, but not quite the angry slur reported by Stacey).  But more importantly, he didn't come forward with his information until 2012, raised questions as to his own credibility, and others who were around when Ludchen posted the announcement in question said that Burns wasn't.  (Not to mention that, of all the lists of names Stacey gave of people who heard the remark, Burns was never on any of them.)

Employer's counsel also argued that Ludchen's offer to apologize constituted an admission.  On other facts, that might be a cogent argument, but on these facts the evidence was that Ludchen didn't know what he was accused of having said, because the employer hadn't told him.  It's not an admission if you don't know what you're admitting.

The judge ultimately concluded that just cause wasn't proven, and awarded Ludchen 12 months' pay in lieu of notice, minus some fairly significant mitigation earnings.

What Should Employers Take Away?

The judge summed up the lesson to be learned by employers here:

[68]           This brings me to the problem caused by the inadequate investigation into this matter.  In my view, as a practical matter, it was unwise for Stelcrete to terminate Ludchen’s employment without conducting an independent investigation in order to assess the validity of the alleged misconduct. Further, it would have been prudent for management to confront Ludchen with the allegations and give him an opportunity to respond. 

[69]           Most concerning was the fact that prior to the termination Dietsch and Nichols never obtained the names of the employees who had direct knowledge of what Ludchen was alleged to have said.  Again, as a practical matter, it is important for management to know who was making allegations about the conduct of one of their supervisors, exactly what was alleged, whether that person worked directly under the supervisor in question, and whether that person had any history of problems with that supervisor.

[70]           Having failed to thoroughly investigate this matter at the time, Stelcrete now has great difficulty assembling the evidence to prove the alleged misconduct on which it acted more than five years ago. Several employees from Ludchen’s assembly division shift testified at this trial. Each of those witnesses had some credibility issues. However, the fact remains that every person from Ludchen’s shift who testified said that they did not hear any anti-Semitic remarks from Ludchen and had not told Stacey that Ludchen had made any anti-Semitic remarks.

Moral Damages

The judge declined to award any moral damages.  The claim was commenced before Honda v. Keays decimated the Wallace doctrine, but in light of Honda, Wallace damages are not available.  There wasn't the evidence to support an aggravated damages claim, and - the judge found - no basis for punitive damages.

At the end of the day, the damages are actually very modest, for a trial of this nature.  I would expect a fairly substantial costs award, but still, it seems problematic for an employer to take a matter to trial on just cause allegations under these circumstances.

Under the Employment Standards Act, Mr. Ludchen should have been paid some 19 weeks (give or take) worth of termination and severance pay within a very short period of time after his termination.  Relying on allegations of just cause, the employer presumably did not make this payment.  We are now nearly six years past that.  Being unable to prove wilful misconduct, that failure to pay is a quasi-criminal offence.

And why?  The problems in the employer's case should have been apparent from fairly early on.  Both sides' counsel are experienced employment litigators, and this action required an unusual number of procedural steps to get Stacey's evidence out into the open, and that should have made the credibility problems apparent.  The employer failed to find any admissible evidence which corroborated Stacey's allegations, and seeing as they were primarily hearsay in the first place, going to trial on the basis of what evidence they had...is surprising.

Had the employer investigated Stacey's allegations immediately, one of two things would probably have happened:

(1) They would have obtained corroborating statements from other witnesses, sufficient to prove just cause, or
(2) They would have found a decided lack of corroboration of Stacey's allegations, and been left with the option of terminating not-for-cause (i.e. paying him out) or merely disciplining him for the conduct he admitted.

One might argue that where this case ended up is Stacey's fault.  One might even imagine causes of action available against Stacey.  But at the end of the day, the termination of employment is between the employer and the employee, and the fact that the employer acted prematurely on inadequate information from an unreliable source, resulting in a long-term failure to pay statutorily-required sums...the employer is ultimately responsible for that, and one might reasonably argue that there should be meaningful consequences for that failure.

Food for thought:  Ludchen obtained significant mitigation earnings.  In the ordinary course, if Ludchen were dismissed on a without-cause basis, he would have received at least his statutory minimums at the outset, and then they would have negotiated regarding the common law notice period.  I have little doubt that the lawyers involved here would have been able to reach a settlement in a case so straightforward, and they probably would have done so well before Ludchen found his new job - there's an incentive on both sides to reach a final resolution before the statutory notice period runs out.  But I would not wager on such a settlement including an accounting for potential mitigation earnings, and certainly not one that would result in a dollar-for-dollar deduction.  (Sometimes, for lengthy notice periods, a mitigation clawback clause is included in the settlement, but even then it's not a 100% clawback.)

In other words, litigation costs aside, the employer's irresponsible hardball tactics may well have saved money.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.