Constructive Dismissal

by Lior Samfiru

Friday, June 20th, 2014 at 2:09 pm

The employee walked solemnly into his manager’s office. The manager then told him about the cost-cutting measures the company was taking in order to survive the economic downturn. The manager went on to explain that as of the following week, the employee’s hours would be cut and pay decreased accordingly. Like thousands of others in the same situation over the past year, the employee was left wondering if the company’s actions were legal.

Court decisions in the area of employment law tend to come in waves, either favouring

employers or employees. 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. The employer would then be required to pay severance to the employee. But, with today’s tough economic climate, there has been a change in the sea, with an increased level of recognition by courts of the economic struggles facing organizations. The result is that some of the protections usually available to employees have been limited.

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 recently 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.”

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

The concept of constructive dismissal, already hanging by a thread, was dealt an additional blow recently by the Supreme Court of Canada. In the case of Evans v. Teamsters Local Union No. 31, the top court in the country determined that an employee who has been dismissed may have to accept an offer to return to work for their former employer. This means that even if a fundamental term of employment is changed by the employer, unless such a change results in significant humiliation, an employee may have an obligation to continue working, as a way to mitigate any damages suffered.

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 the change embarrasses or demeans the employee, whether the change modifies the majority of an employee’s position, and whether 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. 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. Such contracts 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 employers cannot use the economic backdrop as an excuse to take advantage of employees, it should not be assumed that every negative change must be illegal. For this reason, employees are strongly advised not to quit their position without first seeking legal advice.

I frequently meet with individuals facing reduced work hours and compensation as their employer cuts operational costs to address economic challenges. Feeling betrayed and frustrated, many of these individuals are reluctant to continue working for their employer. These days, I often tell them that, given today’s climate, such changes may not entitle them to compensation. Their choice is to quit, or accept the changes and continue working. It is very likely that once the economic situation improves, a new wave will flow in favour of employees. Until then, changes to terms of employment will continue to be a common reality.

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