Wallace Damages are awarded in addition to wrongful dismissal damages. They relate to the manner in which a dismissal was handled by the employer rather than the dismissal itself. As a result, the normal reasonable notice period could be extended when an employee has been subjected to bad faith conduct by an employer, even if that conduct fell short of a separately actionable wrong.
They originated in 1997 with the case Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, 152 D.L.R. (4th) 1, 219 N.R. 161, [1999] 4 W.W.R. 86, 36 C.C.E.L. (2d) 1, 3 C.B.R. (4th) 1. The case dealt with damages for wrongful dismissal. See paragraph 103 which says,
...where an employee can establish that an employer engaged in bad faith conduct or unfair dealing in the course of dismissal, injuries such as humiliation, embarrassment and damage to one's sense of self-worth and self-esteem might be worthy of compensation . . . compensation does not flow from the fact of dismissal itself, but rather from the manner in which the dismissal was effected by the employer.
See also paragraph 96 which says,
employers ought to by held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period.
While Wallace awards become commonplace, in Mulvihill v. Ottawa (City), 90 OR (3d) 285; 65 CCEL (3d) 61; 235 OAC 113, the Ontario Court of Appeal confirmed that the practice was not automatic.
In 2008, Honda Canada Inc, v. Keays, 2008 SCC 39, 294 D.L.R. (4th) 577, 66 C.C.E.L. (3d) 159, fundamentally altered how Wallace damages are awarded. They are no longer awarded by way of an extension of the notice period, but rather as aggravated damages.
Bad Faith Damages in Wrongful Dismissal Cases: Post-Wallace Jurisprudence, by Shafik K. Bhallo, (2006) The Advocate, Vol. 64, p. 337-354 (available in most courthouse libraries and in Hein Online)
Honda Canada Inc, v. Keays, 2008 SCC 39, 294 D.L.R. (4th) 577, 66 C.C.E.L. (3d) 159
Recent Developments Relating to the Awarding of Damages within an Employment Law Context: A Unifying Theory, by Janice B. Payne & Ted J. Murphy, (2005) Modern Law of Damages, Law Society of Upper Canada Special Lectures, p. 465 (available in the Kamloops, Prince George and Vancouver courthouse libraries)
Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, 152 D.L.R. (4th) 1, 219 N.R. 161, [1999] 4 W.W.R. 86, 36 C.C.E.L. (2d) 1, 3 C.B.R. (4th) 1.
Wallace Update: Damages for Bad Faith Dismissal in Canadian Courts of Appeal, by Geoffrey J. Howard and Kacey A. Krenn, (2003) The Advocate, Vol. 61, p. 389-405 (available in most courthouse libraries and by Remote Access)
What Once were Wallace Damages. (December 2011) Ultimate Corporate Counsel Guide.