The Supreme Court of Canada (“SCC“) has clarified and expanded the scope of “constructive dismissal”. In Potter v. New Brunswick Legal Aid Services Commission, the SCC held that placing an employee on paid administrative (i.e. non-disciplinary) leave can constitute constructive dismissal. The SCC determined that employers are required to act in good faith towards their employees and, unless explicitly authorized by the employment contract, employers cannot place employees on leave, even if paid, without providing legitimate business justification. Where an employer fails to do so, the suspension will be viewed as an unauthorized breach of the employment contract, amounting to “constructive dismissal” of the employee, who can then sue the former employer for compensation.

Background

Potter was appointed as the Executive Director of Legal Aid for the Government of New Brunswick. Approximately halfway through his seven-year term, Mr. Potter took a leave of absence for medical reasons until January 18, 2010. Before this leave, Mr. Potter had discussed a potential buyout of the rest of his contract with the Board of Directors (the “Board”) of his employer, the New Brunswick Legal Aid Services Commission (the “Commission”), so that he would resign in exchange for an agreed-upon compensation package.

While Mr. Potter was on leave, the Board unilaterally decided that, if the buyout negotiations were not concluded by January 11, 2010, it would request that the Lieutenant-Governor in Council (“LG“) revoke Mr. Potter’s appointment for cause. On January 11th, the negotiations had not concluded, and the Board made the request to the LG without Mr. Potter’s knowledge. The next day, Mr. Potter was placed on administrative leave and told not to return to work, although he would continue to be paid. Mr. Potter’s duties were indefinitely delegated to another employee, who Mr. Potter had previously chosen to act in his absence. Eight weeks later, Mr. Potter commenced an action for constructive dismissal, at which point, the Board declared that he had effectively resigned from his position and ceased his pay and benefits.

The Test for Constructive Dismissal

Both the majority and the concurring judges of the SCC agreed that the test for constructive dismissal required clarification, as courts have sometimes conflated different aspects of the test or confused different types of dismissals. For this reason, the majority of the SCC set out a two-branch framework for analyzing allegations of constructive dismissal.

Under the first branch of the test, courts must determine: (a) whether a term of the employment contract has been breached and (b) whether the breach has “substantially altered” an essential term of the contract. At the first step, the court is free to examine all of the circumstances of the parties’ relationships and any steps taken by the employer, whether or not they were known to the employee at the time of the alleged dismissal. At the second step, the court must consider whether a reasonable person in the employee’s situation would consider the employer’s unilateral change to have substantially altered the employment contract. At this step, the court’s analysis should only focus on factors that were known to the employee.

The majority noted that the case of administrative suspensions is unique. While employees are generally required to prove that a constructive dismissal occurred, employers will bear the burden of proving that an imposed administrative leave was justified. If the employer succeeds in doing so, no breach will be found and the constructive dismissal claim will be dismissed. However, if the employer fails to prove that the suspension was justified, the employee will then be required to prove that the breach was a substantial change to the employment contract. The majority noted that, in cases involving unauthorized administrative suspension, the finding that an unauthorized suspension constitutes a substantial change is “inevitable”.

Under the second branch of the test, the court must consider whether, given all of the circumstances, a reasonable person would conclude that the employer no longer intended to be bound by the terms of the employment contract. Employees are not required to point to a single specific event or change. Instead, they can argue that the employer’s broader course of conduct indicated that it no longer intended to honour the agreement. In the case of administrative suspensions, the majority noted that, where an employer is unable to show that a suspension is reasonable and justified, there is “little chance” that a reasonable employee would not believe that the employer no longer intended to be bound.

What is a Reasonable and Justified Administrative Suspension?

Because Mr. Potter’s employment contract did not expressly provide the Board with the power to place him on administrative suspensions, the majority considered whether this power was implied. The Commission argued that, because it had no duty to provide Mr. Potter with work, it was implicitly empowered to withhold work and place him on suspension at any time. The majority strongly disagreed, based on the particular circumstances of Mr. Potter’s employment.

More generally, however, the Court noted that the ability to work is now accepted as a fundamental aspect of an individual’s life, from which individuals derive not only monetary and reputational benefits but also a sense of dignity, identity, and self-worth. All administrative suspensions must therefore be both reasonable and justified. Although there is no set list of factors that constitute appropriate justification, courts should always consider whether the suspension is paid or unpaid and whether the employer acted in good faith. The requirement of good faith requires the employer to be honest and forthright in its contractual dealings with the employee, including provide legitimate business reasons to justify an administrative suspension. Where legitimate business reasons do not exist or where such reasons are not provided, the suspension will be seen as an unauthorized breach of the employment contract. Once an administrative suspension is determined to be unauthorized, the remaining elements of the test for constructive dismissal will be found to exist almost as a matter of course.

Implications

The Potter case applies the SCC’s decision last year which established that there is a duty to act in good faith in contractual dealings. While it is well-established that employers must act in good faith in the manner of dismissal of employees under an employment contract, the SCC has made clear in Potter that employers must act in good faith at all times in dealing with employees in a contractual relationship. Part of this obligation requires that employees be provided with sufficient reasons whenever work is withheld, whether the suspension is paid or unpaid. The SCC has also restricted the ability of employers to place non-unionized employees on paid suspensions. Following the Potter decision, an employer must not place an employee on an administrative leave unless there are legitimate business reasons for doing so.

However, it is important to remember that the majority’s analysis regarding reasons for suspensions arose in the context of determining whether the Commission or the Board had an implied power to place Mr. Potter on an administrative leave. If the employment contract (and, in the unique circumstances of the Potter case, the applicable legislation) had expressly stated that the Commission could withhold work from Mr. Potter or ask that he not engage in his employment duties for any reason, the issue of implied authority would not have mattered.

Employers should therefore consider including language in its employment contracts to reserve this power, as a constructive dismissal only occurs where an employer has undertaken a unilateral and unauthorized breach of the employment contract. Where the employee has consented or acquiesced to a change, a constructive dismissal cannot occur. Without this language, an employer should ensure it has legitimate business reasons for placing an employee on administrative suspension.

If you have any questions about the Potter decision or drafting employment contracts, feel free to contact our office for assistance.

With thanks to Jennifer Bernardo for her assistance on this blog.