Monday, December 22, 2008

Constructive Dismissal: Employers Beware

It is often said that people are assets and human capital drives the organization. But unfortunately the same assets and capital are the first to bear the brunt as part of cost-cutting exercises by businesses.

As per Statistics Canada, the Canadian economy lost 71,000 jobs in November 2008, 66,000 of which were here in Ontario. With a slowing economy, more job losses are expected in the months ahead.

However not all employers resort to cutting jobs immediately. Many business will try to manage the slowdown using a combination of different measures like rationalizing salaries, freeze wage increases, cut perks, and try cutting costs wherever possible, be it switching off the lights or economizing on travel.

Some employers see a certain virtue in cutting salaries rather than jobs. My wife's employer, a major travel company, has already started exploring ways of reducing employee costs without actually laying off people. These include employees working lesser hours per week and taking additional vacation time (unpaid). If the organizational culture is good, employees will understand that these are difficult times and will be willing to take these cuts.

However, before employers implement any such cost cutting measures that modify the terms of employment, they have to be careful as to not trigger constructive dismissal claims. Generally speaking an employee is considered to have been constructively dismissed where there is a breach of a fundamental term of the employment contract by the employer.

The principles of constructive dismissal are well established in Canada. As to what constitutes constructive dismissal has been explained in an old English decision,
In re Rubel Bronze and Metal Company and Vos, [1918] 1 K.B:

"Dismissal may be effected by conduct as well as words. A man may dismiss hisservant if he refuses by word or conduct to allow the servant to fulfil his contract of employment. The refusal must of course be substantial in the sense that it is not a mere repudiation of some minor rights of the servant or of non-vital provisions of the contract of employment. The question is ever one of degree. If the conduct of the employer amounts to a basic refusal to continue the servant on the agreed terms of the employment, then there is at once a wrongful dismissal and a repudiation of the contract."

The leading Canadian case on the issue of constructive dismissal is the decision of the Supreme Court of Canada in Farber v. Royal Trust Co. [1997] 1 S.C.R. 846.

"Where an employer decides unilaterally to make substantial changes to the essential terms of an employee's contract of employment and the employee does not agree to the changes and leaves his or her job, the employee has not resigned, but has been dismissed. Since the employer has not formally dismissed the employee, this is referred to as "constructive dismissal". By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and is therefore terminating the contract. The employee can then treat the contract as resiliated for breach and can leave. In such circumstances, the employee is entitled to compensation in lieu of notice and, where appropriate, damages.”

However each constructive dismissal case must be decided on its own facts, since the specific features of each employment contract and each situation must be taken into account to determine whether the essential terms of the contract have been substantially changed.”

Accordingly, it is not every change that gives rise to constructive dismissal - the change must be substantial and must be to an essential term of the employment contract.

Generally it has been held that a demotion and a unilateral reduction in an employee's income by an employer amounts to constructive dismissal.

When asking employees to work fewer hours, employers must be aware that they cannot unilaterally implement such changes. Employers must get the employees prior agreement in writing before implementing such changes.

Some employers resort to a temporary lay off, permitted under the provisions of the Employment Standards Act. However, the courts have held that if the employment contract does not allow the employer to lay-off the employee, such temporary lay off amounts to constructive dismissal.

Following are some examples, where the courts have found constructive dismissal:

  • The employee was demoted and his salary frozen where there had been an agreement
    that it there would be no salary freeze;
  • The employee was not paid a 10% bonus when it was found that this was an integral part of his employment contract;
  • Withdrawal of use of a company vehicle, which was of significant value to the employee in the context of the overall contract;
  • A unilateral change of territory for a commissioned salesman which resulted in an immediate decrease of 25% of the employee’s compensation;
  • The employee was demoted and changes were made to his reporting relationship, responsibility and support, all of which were held to be fundamental changes going to the root of the contract;
  • Unilaterally imposing a cap on the bonus of the employee where there had never been one previously.

- Shashi K. Raina, Toronto

Disclaimer: Nothing in this article should be considered legal advice. Readers are advised to speak to an Employment Lawyer to discuss their specific situations.

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