Constructive Dismissal – Impact of a Tough Economy

by Lior Samfiru

Tuesday, September 5th, 2017 at 10:00 am

Constructive Dismissal: When Times are Tough

When George Smith (not his real name) walked solemnly into his manager’s office, he was told that as of the following week, his hours would be cut and pay decreased. It was part of the cost-cutting measures that his company was making in order to survive the economic downturn. Like thousands of others in the same situation over the past year, George wondered if the company’s actions were legal.

Generally, when an employer unilaterally reduces employee compensation or significantly modifies job duties, the employee can choose to reject the changes and treat their employment as being at an end. This is referred to as a Constructive Dismissal and the employer is required to pay severance. But, with today’s tough changing economic climate (just look at Sears Canada) some Canadian courts are limiting the protections usually available to employees. They are recognizing the economic struggles some organizations are facing.

Recently, courts in Ontario, Nova Scotia and British Columbia found that economic realities must be considered when deciding whether an employer can change factors such as an employee’s compensation and duties. While in prosperous economic times employers may be held to a stricter test that forbids them from significantly changing terms of employment, in trying economic times employers will be given more freedom to make operational changes. As one Nova Scotia judge remarked: “Legitimate business interests can justify a degree of change in the employee’s duties, provided the degree of change is not fundamental to the employment contract.

constructive dismissal

What Are Reasonable Changes?

Where an employer intends to implement unilateral changes, what is viewed as reasonable in the circumstances? Is it reasonable for an employer to cut its employees’ wages by 10 per cent rather than eliminate some jobs altogether? Is it appropriate for a struggling university to reduce a senior administrator’s responsibilities by 25 per cent? Recently, courts have answered “yes” to these questions, signalling that employers do have a level of discretion to make changes, without the risk of facing a claim for constructive dismissal.

The courts have not given employers unlimited authority to modify terms of employment. There are limitations. Courts will still consider the magnitude of the change and its effect on the employee. Where a change creates a vastly different position, it may well result in a constructive dismissal, regardless of economic circumstances.

Employers must also question whether:

  1. the change embarrasses or demeans the employee
  2. the change modifies the majority of an employee’s position
  3. the change can be avoided in light of the company’s economic realities.

If the answer to these questions is “no”, it may be permissible to change the terms of employment.

How to Avoid Constructive Dismissal Claims

Still, the safest way to avoid claims for constructive dismissal is to draft contracts of employment that specifically allow the employer to implement changes to job terms. This would considerably reduce the volume and success of constructive dismissal claims.

For employees, the message is that economic burdens have to be shared with struggling employers. This is especially true for employees in senior positions. While organizations cannot use the economic backdrop as an excuse to take advantage of employees, it should not be assumed that every negative change is illegal. For this reason, employees are strongly advised to seek legal advice before quitting their position.

Our Advice for Employees

There has been a dramatic jump in the number of people caught in these circumstances over the past few years. Feeling betrayed and frustrated, many individuals are reluctant to continue working for their employer. It is important to remember that such changes may not always entitle them to compensation via constructive dismissal. Their choice is to quit or accept the changes and continue working. Before such a decision is made, obtaining legal advice is a must.

Lessons for Employers (to make sure changes are legal)

Review contracts of employment. Consider whether contracts give the employer the ability to implement changes.

Ensure that changes are reasonable. They should be connected to the company’s efforts to reduce costs.

Avoid Embarrassment. Changes should not result in embarrassment to the employees or significantly reduce employee status in the workplace.

Employees in Senior Positions Can Share the Burden. Employees in senior positions are expected to share the burden with the employer, so it may be easier to make reasonable changes to their employment status.


Lessons for Employees (when an employer implements changes)

Consider how changes impact you. Do they impact compensation, job duties or both? It is much easier to object to significant changes to compensation.

Review history of changes to your job. Consider whether there have been changes made in the past, or if this is the first one. If you did not object to a past change, you may be deemed to have accepted further changes.

When you should talk to a lawyer. Where a change is significant or results in embarrassment, consider obtaining legal advice to determine whether you are entitled to compensation from your employer.


Lior Samfiru is a Canadian employment lawyer and co-founder of Samfiru Tumarkin LLP. His firm developed the country’s first Severance Pay Calculator, designed to inform Canadians about their possible severance entitlements beyond the ESA minimum amounts. You can listen to Lior multiple time a week on The Employment Hour.

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