At its very core, the employment contract is a very simple one: an individual agrees to work, and the employer agrees to pay them for their effort. Of course, if everything were that simple, then employment lawyers, like myself, would not have very much to do. In addition to the plethora of other issues that can arise, we are often consulted by employers and employees in relation to proposed changes to the contract of employment. The question then becomes: what is an employer’s right to impose changes to the employment relationship/agreement?
As many readers will already know, legally, this relates to the concept of constructive dismissal. Simply put, a constructive dismissal occurs when one party to the employment agreement (almost always the employer) unilaterally makes a substantial change to a fundamental term of the employment agreement.
The above terms were underlined for a reason. The three key criteria in demonstrating constructive dismissal are that:
- the change was unilateral (and not agreed upon or accepted);
- the change was substantial; and
- the change related to a fundamental term.
Recently, the Supreme Court of Canada had the opportunity to discuss the concept of constructive dismissal in Potter v. New Brunswick Legal Aid Services Commission, and set out the legal test as follows:
At the first step of the analysis, the court must determine objectively whether a breach has occurred. To do so, it must ascertain whether the employer has unilaterally changed the contract. If an express or an implied term gives the employer the authority to make the change, or if the employee consents to or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach. If so, it does not amount to constructive dismissal. Moreover, to qualify as a breach, the change must be detrimental to the employee.
Once it has been objectively established that a breach has occurred, the court must turn to the second step of the analysis and ask whether, “at the time the (breach occurred), a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed” (Farber, at para. 26). A breach that is minor in that it could not be perceived as having substantially changed an essential term of the contract does not amount to constructive dismissal.
Not every change will constitute a constructive dismissal. As they often say, “a little knowledge can be a dangerous thing”. Unfortunately, in the information age, many individuals have heard of “constructive dismissal” and have concluded that even the most trivial change in working conditions gives them the right to sue their employer.
To be actionable, the change must be substantial, and it must relate to a fundamental term. There are no absolute rules with respect to what is “substantial” as there are so many different contexts in which this must be considered.
When it comes to compensation, it is recognized that a nominal change (usually less than five or 10 per cent, but there is no absolute rule) may not be a constructive dismissal, but once the change is greater than 15 per cent, it likely is. Of course, every case will have to be assessed based on its own particular circumstances. For example, generally speaking, being moved from one desk to another will not touch upon a fundamental term of the contract or create a substantial change. However, if it is clear that one location has a greater degree of prestige within the hierarchy of the organization, and the change will negatively impact the employee or their perceived role, then it may well be a constructive dismissal.
Employers often make the mistake of assuming that compensation is the only critical factor, and as long as they do not change the compensation package, everything else is fair game. That is entirely untrue. You cannot demote someone to a lower position and dramatically change their job, while defending the action by proclaiming you maintained his compensation package. Particularly in more difficult economic times, we often work with employers to assess how they can reduce labour costs without triggering constructive dismissal or other claims.
It is also important to recognize that an employee’s response to a proposed change is critical. As the fundamental definition of constructive dismissal indicates, it only applies to unilateral changes. If the employee accepts, either explicitly or implicitly, then they will not have a viable claim. That is why documentation of any objection is critical; we often work with individuals to clearly evidence their rejection of such changes.
What happens if the employee does not accept?
In Wronko v. Western Inventory, the Ontario Court of Appeal attempted to explain what will happen if an employee does not accept substantial changes to fundamental terms. According to the court, there are three potential scenarios:
- the employer imposes the changes immediately – constructive dismissal;
- the employer imposes the changes after providing appropriate notice – not constructive dismissal; or
- the employer chooses not to impose the new terms – not constructive dismissal.
As you can see, employers can still achieve the changes they seek, without liability, by providing appropriate notice of the change. That notice will be equivalent to the notice that must be provided in the event of dismissal without cause, and will therefore require an assessment of applicable legislative, contractual, and common law requirements. It can be extensive. Furthermore, according to the Court of Appeal, the employer must advise the employee of the effective date of the change and explicitly state that their employment will end on that date, unless the employee agrees to continue their employment on the new terms. Otherwise, there will be a constructive dismissal.
The Superior Court of Ontario recently had occasion to consider a constructive dismissal claim in Nufrio v. Allstate. In that case, Allstate gave its sales agents 24 months of notice that their compensation structure, and the location of their employment, would change. However, the company did not clearly state that failure to accept the changes would result in the end of their employment. A claim for constructive dismissal was made, and Justice Pollak found in favour of Allstate, ruling that it had met its obligation to provide clear and appropriate notice of the changes and had not accepted the employees’ rejection thereof. As a result, there was no constructive dismissal.
While constructive dismissal can be a complicated issue, it comes down to a basic principle: in most cases, employers have the right to terminate the employment relationship by providing appropriate notice (or pay in lieu). As a result, they can effectively terminate the existing contract by providing notice of their intention to do so. As long as they clearly advise of this intention, and of the fact that continued employment beyond the notice period will be governed by the new contract, then they should not be guilty of constructive dismissal.
Some employers believe that they can do whatever they want, which is entirely untrue. Just as they would not purpose to call their landlord and tell them that going forward, they will only pay $20 per square foot instead of $40, they cannot arbitrarily cut an employee’s hours or compensation or make other substantial changes to key terms. However, they can implement changes as Allstate did. Employees should be aware of their rights, but also mindful of the fact that not all changes constitute constructive dismissal.
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