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The Dangers of Unpaid Employment in a Start-Up Company

Unpaid internships were discussed in an April 8th posting in this blog and it is clear that most Ontario interns have to be paid.  But what about employees in start-up companies?  Can employers provide them with stock options, shareholdings or the promise of future payment in lieu of current payment of wages?  The short answer is that except in certain defined circumstances, employees must be paid wages, and they must be paid on a regular basis from the time that they begin working for a company.

The Employment Standards Act, 2000 (Ontario) (the “ESA”) defines an employee as “someone who performs work for an employer for wages”.  In turn,  the term “wages” is defined as “monetary remuneration”.  Section IX of the ESA requires employees to be provided with “at least the prescribed minimum wage”.

The Regulations under the ESA have some exemptions in relation to Section IX, but they are limited and generally only apply to certain defined professionals (eg. doctors, lawyers, engineers, architects, teachers), commissioned salespeople, and other specified groups of employees (certain student employees such as camp counselors, and janitors/superintendents who reside in the building that they are responsible for).  It is particularly important for start-up companies to note that there is no wages exemption under Section IX of the ESA for information technology professionals, managers, supervisors or executives.

In addition, because the ESA expressly prohibits employers and employees from entering into an agreement to circumvent the provisions of the ESA, it is not possible for a company founder or similarly-placed employee to agree to forego wages during the start-up period.  The potential risk to a company which permits employees to work without receiving at least minimum wage, is that the employee can make an unpaid wages claim, which in turn can also be a liability to the directors and officers of the company.  In addition, a failure to pay wages as earned can lead Canada Revenue Agency to have a claim for unpaid tax and other withholdings which should have been made.

While there are risks with entering into independent contractor agreements, particularly if the contractors are actually employees under various legal tests, sometimes the safest path for a financially strapped start-up is to consider short-term contractor arrangements until the company is on its feet and generating revenue which can be used to cover payroll for employees.  This can be a tricky area to navigate and should never be done without legal advice, but done properly, it is a better and safer option than failing to pay employees during the initial start-up period.

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The Dangers of Unpaid Employment in a Start-Up Company

Yet Another Reminder on the Importance of Careful Drafting of Termination Clauses…

As if employers needed one, we now have yet another decision invalidating a termination provision for failure to comply with the Employment Standards Act, 2000 (the “ESA”)Miller v. A.B.M. Canada Inc., 2014 ONSC 4062 (CanLII).

Mr. Miller applied for and obtained the position of “Director, Finance and Business Process Improvement”.  Prior to commencing employment, he had signed an employment contract, which contained the following elements of “remuneration”:

  • A base salary of $135,000 per year;
  • Pension contributions up to a maximum of 6% of base salary; and
  • A car allowance of $680 per month.

The employment contract contained the following provision in respect of termination without cause:

“Regular employees may be terminated at any time without cause upon being given the minimum period of notice prescribed by applicable legislation, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation.”

 Mr. Miller commenced employment on September 1, 2009 and was dismissed on a without cause basis on January 26, 2011. The primary issue was whether the termination provision limited Mr. Miller’s entitlement to the ESA minimum (two weeks), or whether he was entitled to common law pay in lieu of notice.

After examining the clause and considering case law (including Wright v. Young and Rubicam Group of Companies and Stevens v. Sifton Properties Ltd.), the Court came to the following conclusions:

  • the length of the notice period in the contract, being “the minimum period of notice prescribed by applicable legislation”, was effective to rebut the presumption of reasonable notice according to common law, and as such (provided the remainder of the contract was valid), the amount of notice was legitimately established in the contract as being the ESA minimum; but                                     
  • the contract breached the ESA requirement that if pay in lieu of notice is provided, all benefits must be continued.  The contract only required the payment of “salary” in lieu of notice. The failure of the contract to require payment of the 6% pension contribution and the car allowance rendered the clause contrary to the ESA, and void for all purposes, such that Mr. Miller was entitled to common law pay in lieu of notice.

The Court also made the observation (although technically this was not a required part of the decision and would be considered obiter), that the wording of the provision at issue will determine whether it is enforceable, rather than the actual actions of the parties.  In other words, if a provision is unenforceable because it does not comply with the ESA in some respect, the fact that the employer does actually comply with the ESA will not render the provision at issue enforceable.

Interestingly, the Court held that although the termination provision was invalid, Mr. Miller “cannot escape bearing some responsibility for the fact that both parties entered into a contract which fell below ESA standards”, which seems to suggest that the Court still considered the contract when assessing the common law notice period. Ultimately, after considering Mr. Miller’s age (39), length of service (17 months) and position (Director, Finance and Business Process Improvement), the Court awarded three months of pay in lieu of notice at common law.

Mr. Miller thus received three months of pay in lieu of notice, rather than the minimum two weeks pursuant to the ESA.  This case stands as yet another reminder that termination provisions must be carefully drafted to meet the ESA in every respect, or they will be subject to attack, resulting in the employee potentially being entitled to common law pay in lieu of notice.

Miller v. A.B.M. Canada Inc., 2014 ONSC 4062 (CanLII)

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Yet Another Reminder on the Importance of Careful Drafting of Termination Clauses…

Join us May 1st for Dentons’ Spring Employment and Labour Law Update

Please join us on May 1st for a complimentary seminar /webinar on the following topics:

July 1st Deadline Looming: How to Comply with Ontario’s New Safety Awareness Training Regulation
Adrian Miedema

Internal Fraud — Managing Termination and Asset Recovery Options
Mark Evans and Blair McCreadie

An Update on Ontario’s Workplace Violence and Workplace Harassment Law
Saba Zia

CHRP Accreditation
This program may be eligible for recertification points.

CPD Accreditation
This 1.5 hour program can be applied toward 9 of the 12 educational hours for Continuing Professional Development required annually by the Law Society of Upper Canada. Please note that these CPD hours are not accredited for the Professionalism Requirement.

Event Details

May 1, 2014
Registration & Breakfast
8:00 – 8:30 a.m. EDT
Seminar
8:30 – 10:00 a.m. EDT

Dentons Canada LLP, 77 King St West, North Building, 5th Floor, Toronto

Or by webinar

To RSVP:

RSVP to Carla Vasquez, Specialist, Marketing and Events at carla.vasquez@dentons.com.

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Join us May 1st for Dentons’ Spring Employment and Labour Law Update

Benefits for Employees over Age 65

As of December 2006, the Ontario Human Rights Code was amended to abolish mandatory retirement. However, the provincial government intentionally did not make corresponding revisions to the Employment Standards Act or the Workplace Safety and Insurance Act. As a result, the law prohibits employer-initiated termination of employment because an employee has reached the age of 65. Voluntary retirement remains acceptable and common. However, employees who work past age 65 are not covered for work-related injuries and need not be covered by group benefit plans. The maximum period for which loss of earnings benefits will be paid under the workers’ compensation system is two years after the date of injury if the employee was age 63 or older on the date of injury. While some employers have arranged for benefit plans to cover employees over age 65, given the increased premium costs, this can lead to a decrease in benefit coverage for all employees or other types of trade-offs. In addition, some unionized employers have been required to provide group health benefits to employees over age 65 due to the wording of a collective agreement – typically a benefits clause which describes the benefits for all members of the bargaining unit.

It was foreseeable that this hybrid status of a worker over age 65 – legally protected from mandatory retirement but not legally protected to receive continued benefits – would lead to litigation. Such an employee would face difficulty succeeding with a complaint under the Employment Standards Act, Human Rights Code or Workplace Safety and Insurance Act since these provincial laws all permit this differentiation.

The Human Rights Tribunal of Ontario (HRTO) is currently hearing such a case. The employee is a unionized teacher who is representing himself. His union cannot bring forward a grievance because it has reached an agreement with the school board in exchange for lump sum payments to teachers over age 65. Nor is the union appearing at the HRTO proceedings. So far, there have been a number of Interim Decisions and Case Assessment Directions issued in the case and the teacher has been unsuccessful in alleging unlawful age discrimination. The final argument, which continues to proceed through the HRTO process, is whether the Human Rights Code of Ontario contravenes the equality rights provisions of the Canadian Charter of Rights and Freedoms, a significant legal challenge for a lone, unrepresented employee.

We will be following this important case as it continues to unfold.

Talos v. Grand Erie District School Board, 2013 HRTO 1949; 2014 HRTO 529

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Benefits for Employees over Age 65

Not Quite an Eye for an Eye – Judge rules that Employee’s “Kick in the Butt” Excuses Co-Worker’s Punch in the Mouth

Does a “kick in the butt” excuse a punch in the mouth? That was the question facing the Court in the recent case of Li v Furguson, 2013 CanLII 91746 (Ont. Sm. Cl. Ct.).

Peng Li and Winston Furguson worked in the shipping and receiving department of a furniture company. Li and Furguson’s coexistence was initially uneventful; however, their relationship had begun to disintegrate following allegations by Li that Furguson was stealing from the company.

On April 19, 2011, things between Li and Furguson reached a boiling point. After searching for Furguson throughout the warehouse, Li finally found his target and confronted him. What happened next was a source of disagreement between the parties, although the judge adopted the following facts. Li began speaking very closely to Furguson; so close that spit was transferred to Furguson’s face, albeit unintentionally. As Furguson tried to break free, Li kicked Furguson in the “butt” with his steel-toe boots. Furguson then wheeled and punched Li twice – one blow was inconsequential, the other was not as it resulted in Li incurring over $7,000.00 in costs for restorative dental services.

At trial, Li argued that he was entitled to damages from Furguson for the tort of battery. However, in the judge’s view, Li’s actions amounted to implied consent to the battery:

Having insulted, berated and confined a person at close quarters, then scuffled with them and kicked them I cannot see how a reasonable person could maintain that a punch or two in return was beyond their reasonable contemplation as being with the scope of what they had implicitly consented to.

 

In addition, the judge held that Li had provoked Furguson by kicking him. Although provocation was not a complete answer to Li’s claim of battery, it nonetheless operated to mitigate the damages that Li had in turn claimed.

In light of these facts, the judge dismissed Li’s claim in its entirety.

It is important to note that while Li had originally brought an action against his employer in which he made a number of claims, including one for “wrongful dismissal”, this action was discontinued before trial. Regardless, apart from the civil liability above, the altercation between Li and Furguson would certainly attract the attention of any employer’s workplace violence policy and potentially lead to discipline.

Li v Furguson, 2013 CanLII 91746 (Ont. Sm. Cl. Ct.)

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Not Quite an Eye for an Eye – Judge rules that Employee’s “Kick in the Butt” Excuses Co-Worker’s Punch in the Mouth

“Oh, what a tangled web we weave when first we practice to deceive.”

Employer avoids liability for harassing texts sent by rogue employee

In an interesting decision, the Human Rights Tribunal of Ontario has ruled that an employer is not liable for discriminatory and harassing texts sent by a rogue employee to another of its workers.

In Baker v. Twiggs Coffee Roaster, Tamra Baker commenced a human rights application against her former employer, Twiggs Coffee Roaster, alleging that her pregnancy was a factor in the decision to terminate her employment. In support of her application, Baker relied on a series of text messages that she received from her friend and coworker, Cara VanDerMark in which VanDerMark advised Baker that the owner of the coffee shop had found out that Baker was pregnant and didn’t believe that she could do her job as she became “bigger”. Of course, this was all news to the coffee shop’s owner, who had instructed VanDerMark to call Baker and let her know that she was not needed for her scheduled shift; the owner intended to terminate Baker’s employment later that day for performance reasons.

Following a two-day hearing, the Tribunal ruled that there was no evidence to suggest that the employer knew that Baker was pregnant at the time that her employment was terminated. As a result, there was no breach of the Human Rights Code. Based on the evidence, the Tribunal concluded that VanDerMark had mistakenly thought that it would be less upsetting to her friend to think that her employment was terminated because of her pregnancy instead of her job performance, so she lied.

However, because VanDerMark’s text message could arguably constitute sexual harassment, the Tribunal considered whether the employer should be held vicariously liable for her behaviour. Ultimately the Tribunal recognized that under the Human Rights Code, a corporation cannot be held vicariously liable for the acts of its employees, agents or officers when it comes to sexual harassment unless the employer was aware of the behaviour and failed to take reasonable steps to correct it. Given that the employer was unaware of the co-worker’s texts, it could not be vicariously liable for these actions.

This case is a good reminder for everyone – employers and employees – to think before they click send on any text or e-mail message. As this case demonstrates, trouble may be only one click away!

Baker v. Twiggs Coffee Roaster, 2014 HRTO 460

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“Oh, what a tangled web we weave when first we practice to deceive.”

Upcoming Ontario Ministry of Labour blitzes

Ontario’s Ministry of Labour has announced several upcoming blitzes during which it will ensure that employers in specified industries are compliant with particular areas of concern under the Employment Standards Act, 2000 (“ESA”).  Both provincial and regional blitzes have been announced.

A recent posting on this blog dealt with the issue of unpaid internships, in follow-up to the announcement by Toronto Life magazine and The Walrus magazine that they were ending their unpaid internships following recent government inspections.  Those inspections were part of the announced blitz with a focus on interns, which began in April and will continue until June in the areas of marketing/public relations, software development, retail, media, film and entertainment industries.

Also on the horizon is a provincial blitz to focus on vulnerable and temporary foreign workers which has been announced for the period from September to November 2014 in the following industries: restaurants, building services, personal care services, business support services and agriculture. 

Finally, that will be followed in early 2015 with a provinncial blitz on temporary help agencies, in order to ensure that they are compliant with the laws relating to temporary help workers.

On a regional level, Simcoe, Peel, Dufferin & York veterinary clinics and security service firms will undergo a general ESA blitz in June and July of 2014.  At the same time, Toronto and Durham region car dealerships and supermarkets will also undergo a general ESA blitz.  Ottawa, Kingston, Peterborough, Hamilton, Kitchener/Waterloo, London and Windsor seasonal businesses and tourism-related businesses will see their own general ESA blitz from June through August and finally, professional offices in Northern Ontario will see a similar blitz in June and July.

It is always good to have your house in order; however, for companies which may be targeted by one of the blitzes noted above, it is of particular importance that your business be compliant with the ESA.

For more information, the Ministry’s announcement can be found at the following link:  https://www.labour.gov.on.ca/english/resources/blitzschedule.php.

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Upcoming Ontario Ministry of Labour blitzes

Beware the Unpaid Intern – He/She May be Eligible for Pay

The issue of unpaid internships is becoming a growing concern for both employers and Ministry of Labour Inspectors. Recently, the publisher of magazines Toronto Life and The Walrus announced that they were pulling the plug on their unpaid internships following a Ministry of Labour inspection (http://www.cbc.ca/news/business/unpaid-internships-at-toronto-life-the-walrus-shut-down-by-ontario-1.2589115). Rogers has subsequently followed suit, with a company spokesperson announcing that the company wants all internships to be associated with an educational institution or to be paid (http://www.thestar.com/news/gta/2014/04/03/unpaid_interns_dropped_from_rogersowned_magazines.html).

Provincial employment standards legislation in Canada generally requires that all “employees” receive minimum wage and that the employer meets other minimum standards. The legislation does, however, recognize that there is a benefit to allowing unpaid internships, while at the same time ensuring that certain requirements are met in order to prevent an employer from characterizing vulnerable workers as “interns” to avoid the obligation to provide the minimum standards.

The employment standards requirements for retaining unpaid interns vary significantly across Canada. This blog will examine the requirements in Ontario and Québec.

Ontario Requirements

Internships in the School Context

An individual can work and not be subject to the Employment Standards Act, 2000 (the “ESA”) in either of the following circumstances:

  • he/she is a secondary school student who performs work under a work experience program authorized by the school board that operates the school in which the student is enrolled; or
  • he/she performs work pursuant to a program approved by a college of applied arts and technology or a university.

If either of these exemptions applies, the individual can be retained without the organization meeting the requirements of the ESA.

Internships Outside of the School Context

If the internship program is not affiliated with a college of applied arts and technology or a university, an individual receiving training in skills similar to those used by the organization’s employees is an “employee” and is entitled to the minimum requirements of the ESA (including minimum wage), unless all of the following conditions are met:

  • The training is similar to that which is given in a vocational school;
  • The training is for the benefit of the individual;
  • The organization providing the training derives little, if any, benefit from the activity of the individual while he or she is being trained;
  • The individual does not displace employees of the organization providing the training;
  • The individual is not accorded a right to become an employee of the organization providing the training; and
  • The individual is advised that he or she will receive no remuneration for the time that he or she spends in training.

Only if all of these requirements are met is the person exempt from the ESA. If even one of these conditions is not satisfied, the individual would be entitled to the minimum standards of the ESA.

Québec Requirements

Internships in the School Context

Section 3(5) of Québec’s Act respecting Labour Standards (the “ALS”) provides that the ALS does not apply to a student who works during the school year in an establishment selected by an educational institution pursuant to a job induction program approved by the Ministère de l’Éducation, du Loisir et du Sport (the Ministry of Education). The fact that the ALS does not apply to such students implies that an employer may not be required to pay them.

However, each of the conditions mentioned in this provision must be present in order for the exception to apply. To be excluded from the application of the ALS, the individual must meet all of the following four conditions, namely:

  • be a student;
  • who works during the school year;
  • in an establishment chosen by an educational institution;
  • pursuant to a job induction program approved by the Ministère de l’Éducation, du Loisir et du Sport.

Internships Outside of the School Context

In Québec, whenever an “internship” takes place outside of the school/student context such that the above exception is not applicable, the Regulation adopted under the Act respecting Labour Standards (“RLS”) provides that the minimum wage requirement does not exist for “trainees” or “students” such as:

  • a student employed in a non-profit organization having social or community purposes, such as a vacation camp or a recreational organization;
  • a trainee under a program of vocational training recognized by law (this law must provide for the nature and duration of the vocational training, i.e. internship in a law firm after Bar school); or
  • a trainee under a program of vocational integration under section 61 of the Act to secure the handicapped in the exercise of their rights.

The mere fact that trainees fall within any of the three above exceptions does not mean that they should not be paid at all during the internship, but rather means that the employer is not bound by the minimum wage rate requirement. However, where an employer chooses not to pay such trainees at all, the trainees do not have recourse pursuant to the ALS.

Whether in Ontario, Québec or elsewhere in Canada, we recommend that if an employer is contemplating retaining unpaid interns, legal advice be sought to ensure that the program meets the applicable provincial criteria. In addition, there should always be written documentation (such as an offer letter) making clear that the position is unpaid because the person is a student, trainee or an intern, to avoid later disputes that the individual did not understand the nature of the opportunity or the fact that he/she would not be paid.

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Beware the Unpaid Intern – He/She May be Eligible for Pay

Criminal Sentence for Unauthorized Access of Former Co-Worker’s E-mail Reduced on Appeal

A terminated employee was convicted of “Mischief to Data” and “Unauthorized use of a Computer” contrary to the Criminal Code after he remotely accessed a former co-worker’s e-mail without her authorization and forwarded several e-mails to his personal account. In this recent appeal decision, the Summary Conviction Appeal Court reduced the terminated employee’s sentence to a conditional discharge after taking into consideration, among other things, the potential impact of a criminal conviction on his current and potential employment opportunities.

In R. v. Charania, the appellant was terminated from his employment as the Director of Care at a nursing home. Later that same evening, the appellant used the username and password of Ms. Caven, the Human Resources Coordinator at the nursing home, to remotely access her e-mail. Once in her e-mail, the appellant forwarded several e-mails relating to their meeting and his employment to his personal e-mail account. At the same time, Ms. Caven was also attempting to remotely access her e-mail using her username and password. She was repeatedly denied access and eventually locked out of the system, which led to a complaint to IT, and subsequently, to an investigation by the nursing home and the police.

Contrary to the appellant’s claim, Ms. Caven denied providing the appellant with her username and password. Based on the totality of the evidence, the trial judge found the appellant guilty of the offences charged. She conditionally stayed one count and on the other count sentenced the employee to a fine of $1,300.00 and placed him on probation for 18 months with terms including restitution. The appellant appealed his sentence.

The Summary Conviction Appeal Court found that the trial judge committed an error by considering the appellant’s defence as an aggravating factor and again when considering the viability of a conditional discharge. In considering whether to vary the sentence imposed by the trial judge, the court stated that the potential impact of a criminal conviction on the offender’s current and potential employment opportunities is a relevant consideration in deciding between a criminal conviction and a conditional discharge. The court went on to consider that the appellant was a first time offender with no prior criminal record. He had a Bachelor of Science in Nursing, with a minor in healthcare administration and was studying for his Master’s degree. Prior to these offences he had a solid employment history and had contributed to the community through volunteer work. Further, as a registered nurse the appellant was facing additional consequences for his conduct as a result of disciplinary proceedings by the College of Nurses of Ontario.

Ultimately, the Summary Conviction Appeal Court held that, in these particular circumstances, a conditional discharge would neither be contrary to the public interest nor would be inconsistent with the fundamental purpose and principles of sentencing in the Criminal Code.

R. v. Charania, 2014 ONSC 1695

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Criminal Sentence for Unauthorized Access of Former Co-Worker’s E-mail Reduced on Appeal

Direct Evidence of Discrimination not Required: Ontario Human Rights Tribunal

Direct evidence of discrimination is not required for an employee to succeed before the Human Rights Tribunal of Ontario, the Tribunal has decided.  The decision provides guidance as to what evidence is required to prove discrimination.

In Islam v. Big Inc., 2013 HRTO 2009, the Human Rights Tribunal of Ontario ordered a Toronto restaurant to pay nearly $100,000 in damages to three former kitchen employees.

The former employees alleged discrimination in employment contrary to the Ontario Human Rights Code after their employment ended (two of the employees were dismissed while the third quit). The applicants were immigrants from Bangladesh who spoke Bengali and were practising Muslims. They alleged discrimination by their employer on the grounds of race, colour, ancestry, place of origin, ethnic origin and creed. Their complaints included allegations that the owners mocked them when they spoke Bengali, implemented an “English in the kitchen” rule, insisted that two of the employees taste pork even though it was against their religious beliefs, and forced one worker to taste the food he was preparing while he was fasting during Ramadan.

In its decision, the Tribunal discusses what evidence is required to prove discrimination:

Direct evidence of discrimination, such as testimony from a witness to discriminatory conduct, is not necessary to establish a breach of the Code. The applicant may rely on circumstantial evidence, which may include evidence of actions or omissions on the part of the respondent that raise inferences that a Code provision has been breached. The inference drawn need not be inconsistent with any other rational explanation to provide evidence of discrimination. Rather, it must be reasonable and more probable than not, based on all the evidence, and more probable than the explanation offered by the respondent. Evidence must always be sufficiently clear, convincing and cogent to satisfy the “balance of probabilities” test stated by the Supreme Court of Canada in F.H. v. McDougall, 2008 SCC 53 (CanLII).

In this case, the parties disagreed as to whether many of the alleged incidents had occurred at all. The Tribunal held that “finding that it is more probable than not that a contested event occurred or did not occur is not the same as finding that any particular witness is not speaking the truth”. There is a difference between credibility (i.e. a willingness to speak the truth as the witness believes it to be) and reliability (i.e. the actual accuracy of the witness’s testimony). The Tribunal outlined the following factors to be considered in appraising reliability and credibility of witnesses:

  • The internal consistency or inconsistency of evidence;
  • The witness’s ability and/or capacity to apprehend and recollect;
  • The witness’s opportunity and/or inclination to tailor evidence;
  • The witness’s opportunity and/or inclination to embellish evidence;
  • The existence of corroborative and/or confirmatory evidence;
  • The motives of the witnesses and/or their relationship with the parties;
  • The failure to call or produce material evidence.

Despite the fact that the Tribunal found “[t]here is little uncontested or objectively verifiable evidence available to guide [it] in making findings of fact”, the Tribunal ordered the respondent to pay to the three applicants close to $28,000, plus interest, to compensate for loss of income. In addition, the Tribunal awarded damages to the three employees, in the amounts of $37,000, $22,000 and $12,000 respectively, to compensate for violations of the inherent right to be free from discrimination, and for injury to dignity, feelings and self-respect, including the continuing stress caused by failure to investigate his complaints of discrimination.

Islam v. Big Inc., 2013 HRTO 2009

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Direct Evidence of Discrimination not Required: Ontario Human Rights Tribunal