During the current recession, employers may be tempted to make substantial changes or dismiss a portion of their workforce to reduce operating costs.  Even with preparation, both of these options expose employers to damages for constructive dismissal. 

Constructive dismissal occurs when there is a unilateral change that substantially alters an essential term of employment (Farber v. Royal Trust Co. [1997] 1 S.C.R. 846 (“Farber”)).  The test for constructive dismissal was recently reaffirmed in Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10 (“Potter”).  According to Potter, the test has two branches.  First, the court must identify an express or implied contractual term that has been breached and then determine whether that breach substantially altered an essential term of the contract.  Under the second branch, the court must consider whether the conduct of the employer, when viewed in light of all the circumstances, would lead a reasonable person to conclude that the employer no longer intended to be bound by the terms of the contract.

An employer’s focus during an economic downturn will most likely be on the first branch of the Potteranalysis.  The employer should assess whether the change being considered substantially breaches an essential term of the contractual relationship between the employer and the employee.  When made by the court, this determination is fact specific and based on what a reasonable person in similar circumstances would consider substantial.  Even a minor alteration may be considered substantial depending on the impact to the employee.  It is especially problematic when the minor change touches upon the duties, responsibilities, and prestige of the employee  (Morgan v. Vitran Express Canada Inc., 2015 ONCA 293 (“Morgan”)).  For instance, if an employer lowers wages by less than 10%, even though wages are arguably the most essential term of the contract, that alone typically will not constitute constructive dismissal.  However, if that employer, in the interest of financial reorganization, assigns a manager a new role in which he or she is working alongside employees that he or she once supervised or managed, it is probable that the employee has been constructively dismissed, even if managerial duties were never expressly determined.

Once notice of a substantial change is provided, the employer must be prepared for one of three responses.  The employee may:

  • accept the change, either expressly or impliedly;
  • reject the change and continue working; or
  • reject the change and sue for constructive dismissal.

If the employee rejects the change but continues to work, the employer can provide reasonable notice of termination.  In this circumstance, the employee may continue to work under the old terms for the notice period.  After the reasonable notice has come to an end, the employer may offer to rehire the employee under the new terms.  If the employer does nothing after the employee’s rejection of the terms, the notice of the change is spent and the employee is entitled to insist on the terms of the original contract (Wronko v. Western Inventory Service Ltd., 2008 ONCA 327).

If the employee rejects the change and subsequently leaves, making a claim for constructive dismissal, additional steps, such as offering the employee continued employment, should be considered.  Damages for constructive dismissal are calculated in the same manner as damages for wrongful dismissal:  pay in lieu of reasonable notice subject to the employee’s duty to mitigate, unless there is an enforceable employment agreement that limits the employer’s liability.  Mitigation or the employee’s failure to accept a reasonable opportunity to mitigate may substantially reduce damages owed by the employer. 

If an employee is constructively dismissed as a result of a change to his or her position for legitimate business purposes, the court is more likely to find the employee is required to mitigate by returning to the same employer, promoting an “efficient breach” (Farwell v. Citair Inc., 2014 ONCA 177 (“Farwell”)).  According toEvans v. Teamsters, Local 31, 2008 SCC 20 (“Evans”) at para. 31, this is due to the fact that a termination based on legitimate business reasons such as economic motivation is less personal than a termination based on performance.  The determining factor on whether the employee will be expected to accept a mitigation offer is whether the employee would be returning to a poisoned atmosphere of hostility and embarrassment:

“[It is] appropriate to assume that in the absence of conditions rendering the return to work unreasonable, on an objective bias, an employee can be expected to mediate damages by returning to work for the dismissing employer.” (Evans)

In Morgan, the court determined that the employee was constructively dismissed and the employer did not meet the onus of establishing that a reasonable person would have accepted continued employment to fulfill the employee’s duty to mitigate.  The court looked at both the nature of the new job as well as the unfriendly atmosphere created by the employer throughout the process.  Subsequently, the court concluded that there was no obligation to mitigate damages under the previous employer.

Even in times of economic stress, it is important that employers are transparent about the choices made and communicate these choices to employees with respect.  The way in which the employer acts during the term of employment and at the time of the alleged constructive dismissal may be taken into consideration by the court in assessing the employee’s obligation to mitigate:

“[A]lthough an objective standard must be used to value whether a reasonable person in the employee’s position would have accepted the employer’s offer (Reibl v. Hughes, [1980] 2 SCR 880 (SCC)) it is extremely important that the non-tangible elements of the situation - including work atmosphere, stigma and loss of dignity, as well as nature and conditions of employment, the tangible elements - be included in the evaluation.” (Evans)

In Jadubir v. Martinrea International Inc., 2012 ONSC 1367 (“Jadubir”), the employee was constructively dismissed when the company was forced to implement a plant-wide layoff due to economic challenges.  The employer met the onus of establishing that there was no objective reason, besides a reduction in pay, for the employee not to return to work during the months he was offered re-employment.  The damages owing to the employee from September to December of that year were limited to the $7 differential between the original salary and the salary offered for the purposes of mitigation. 

In Farwell, the court was confronted with a similar situation to Jadubir, but came to a varied result.  The court determined that the employee had been constructively dismissed, but there was no duty to mitigate any loss by returning to the previous employer.  The court agreed that the employer’s decision was economically motivated and did not involve any animus towards the employee.  The issue was that the duty to mitigate at the previous place of employment was never triggered.  The employer must make the offer after the employee claims for constructive dismissal; previous offers are inadequate:

“To paraphrase Evans, the appellant’s mitigation argument presupposes that the employer has offered the employee a chance to mitigate damages by returning to work.  To trigger this form of mitigation duty, the appellant was therefore obliged to offer Mr. Farwell the clear opportunity to work out the notice period after he refused to accept the position of Purchasing Manager and told the Appellant that he was treating the reorganization as constructive and wrongful dismissal.” (para. 20)

Economic factors dictate many of the difficult decisions employers have to make.  If a change is required, employers should attempt to make the change in accordance with the employment contract (Potter). If there are no contractual terms covering the change, employers should attempt to gain consent from their employees before implementation.  Where a change is necessary and where it negatively effects an essential term of the employment contract, it is not always possible to act in accordance with the contract or by consent.  In this situation the emphasis should be on treating the employee with dignity and respect in applying the change and offering employment for purposes of mitigation if necessary.  While the court will apply Farber and Potter in determining whether there was in fact a constructive dismissal, damages will be reduced if the dismissed employee failed to mitigate where a reasonable person would have accepted an express opportunity to do so.