Understanding Constructive Dismissal

R. Mark Fletcher, LL.B

Grosman, Grosman & Gale LLP
© Leader Quest Inc. and R. Mark Fletcher

Employers and employees commonly misapprehend what constitutes constructive dismissal and both are frequently unclear about the legal ramifications that flow from it.

On the one hand, employers often expose themselves to potential liability arising from constructive dismissal when business decisions impact on important terms of employment such as employee compensation, duties, reporting structure. Meanwhile, on the other hand, employees who face such employer initiated “unilateral” changes to the terms of employment are often unclear as to their rights and are at a loss as to what can be done about their situation.

This article will outline, albeit briefly, the legal principle of constructive dismissal. In addition, suggestions will be made as to how not for profit organizations can manage their employee relations in a manner that minimizes the potential constructive dismissal liability risk that can arise when implementing organizational changes or managing day-to-day operations. Moreover, the article will offer some guidance to not-for-profit employees who encounter employer initiated unilateral changes to the terms of employment.

What is a “Constructive Dismissal”?

In Farber v. Royal Trust Co., the Supreme Court of Canada explained constructive dismissal as follows:

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 has been referenced 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.

To reach the conclusion that an employee has been constructively dismissed, the court must therefore determine whether the changes imposed by the employer substantially altered the essential terms of the employee’s contract of employment.”

The types of unilateral changes that amount to constructive dismissal vary from case to case, depending on the nature of the change and the employment relationship in question. Constructive dismissal may arise in the following situations:

1. Where the employer unilaterally and without reasonable notice reduces the base salary earned by an employee;

2. Where the employer demotes an employee who held a managerial position with a number of direct reports and places the employee in a role either without or with diminished managerial responsibility and no or fewer direct reports;

3. Where the employer removes essential components of an employee’s compensation, such as taking away certain important employee benefits, car allowance, and or bonus entitlement; or

4. Where the employer unilaterally and without reasonable notice transfers an employee to a different geographical work location and the new work location is a significant distance from the former location.

This list is by no means exhaustive of the types of significant unilateral changes that may lead to a constructive dismissal, although the majority of situations that can trigger a constructive dismissal invariably fall into one of the above noted situations.

Moreover, a constructive dismissal can occur without a fundamental change to an essential term of the employment relationship. If, for instance, an employer engages in conduct that demonstrates that it no longer intends to be bound by the employment contract such conduct may give rise to a constructive dismissal. In the Ontario Court of Appeal decision in Shah v. Xerox Canada Limited, the employer was found to have constructively dismissed the plaintiff employee on the basis that it created a poisoned or hostile work environment that made the employee’s continued employment with the organization untenable.

Accordingly, employers must be vigilant in preventing employees from engaging in harassment and should closely monitor the interpersonal relationships of managers and their subordinates and should take corrective action in situations where a manger’s management style is hostile or abusive, to minimize the constructive dismissal risk. In addition, employers should ensure that managers are properly trained in how to address situations of harassment. It is advisable to have a workplace policy on harassment in place that clearly outlines the appropriate process to be followed.

If a constructive dismissal does occur, the employee may sue the employer for damages on the basis that the constructive dismissal amounts to a wrongful dismissal.

Minimizing Risk For Employers

An employer is entitled to manage its workplace and implement unilateral changes to the employment contract from time to time provided that reasonable notice of any changes is given to the affected employees. For instance, if the employer intends to make major changes to an employee’s compensation, such changes should take effect only after reasonable notice of the change. The requirement that an employer provide reasonable notice to an employee of its intention to implement significant changes to the terms of employment has its roots in the employer’s duty to provide reasonable notice of dismissal. The two requirements are very closely related. Accordingly, an employer may be able to avoid a finding of constructive dismissal where it has provided reasonable advance notice to an employee of the significant change to the employment contract.

Employers are encouraged to assess the potential impact of any proposed changes to the terms of employment on an individualized basis which includes a review of the historical relationship between the parties. In some cases, for instance, it may be reasonable for an employer to unilaterally transfer an employee who has accepted transfers in the past. Meanwhile in other cases, it may constitute constructive dismissal to unilaterally transfer an employee who has worked in the same location for twenty years and has never been transferred. In either type of case, it is recommended that employers provide reasonable notice of whatever changes are to be implemented. Finally, employers should document communications with employees affected by changes to their employment and ensure that records are well kept.

Employers are also advised to require their employees to enter into written employment agreements that provide for an employer’s right to make reasonable changes to the terms of employment that will permit greater flexibility in effectively managing the workplace.

Employee Strategies

It is important for an employee who disagrees with any major unilateral changes to their employment contract to seek legal advice right away. An employee has a number of potential options, ranging from continuing to work while making it clear to the employer that the change is unacceptable, continuing to work and accepting the change as a new term of employment, or resigning on the basis that he or she has been constructively dismissed. There are various pros and cons of pursuing the various options and legal advice should be obtained.

Any correspondence from the employee to the employer should be written in a polite and professional fashion, bearing in mind that such correspondence may one day appear in front of a trial judge. An employee should be careful to fully document the situation since such documentation may also become very useful in proving the case for constructive dismissal.

Finally, before resigning from the employment relationship, employees are strongly advised to seek legal advice since, if constructive dismissal is not found, an employee’s resignation amounts to a voluntary quit and the employee in question will not be entitled to any damages. In addition, in certain situations, the employee will be required at law to continue to remain in the constructive dismissal position to mitigate or offset the damages that he or she sustains as a result of the breach of contract by the employer.

This article may be reproduced for distribution as a learning tool for organizations in the not-for-profit sector provided attribution is made to R. Mark Fletcher, LL.B. of Grosman, Grosman & Gale LLP, Toronto; and to Leader Quest Inc.

This article contains material of general interest only and is not intended to provide legal advice or to replace a consultation with a legal professional on any particular matter. R. Mark Fletcher can be reached at mfletcher@grosman.com or 416-364-9599.