Court sets out required process for implementing pay cuts and other significant changes

In an important decision, an Ontario judge found that an employee whose pay was cut could bring a constructive dismissal suit while still actively working.

Kerr Bros Ltd., well‐known candy manufacturer, was in financial difficulty. The new president decided that all employees were overpaid. All employees were given pay cuts. Four employees, including Lorenzo Russo, were thought to be particularly overpaid and were thus subject to deeper pay cuts.

Russo had 37 years of service and was the warehouse manager. He was told that his total compensation pay would be cut by nearly 50% ‐ from $114,000.00 to $60,000.00 ‐ by way of a salary reduction, termination of bonus, and dissolution of the pension plan.

Russo kept working for Kerr and sued for constructive dismissal. He then filed a motion for summary judgment – quick judgment without a trial.

The Ontario Superior Court decided that Russo had the right to sue for constructive dismissal while he was still employed. Russo kept working in order to “mitigate” his constructive dismissal damages. However, if Russo kept working for Kerr after the reasonable notice period had expired, he would be considered to have accepted the pay cut as of that date.  

Employers are free to ask an employee to accept a significant pay cut. However, if the employee rejects that cut, the employer cannot impose the cut immediately without paying damages for constructive dismissal (which will be the amount of the difference between the old and new compensation level over the reasonable notice period). According to the court, the proper approach is to give the employee reasonable working notice that his or her current employment contract will terminate, and then “offer” the employee a new contract (with the lower pay level) as of that termination date. If the employee does not accept the offer of the new contract, he or she may leave but will not be entitled to constructive dismissal damages (apart from severance pay under the Employment Standards Act as applicable).  

For employers, pay cuts can now be fraught with risk. If the pay cut is large enough to qualify as a constructive dismissal ‐ the cases show that a cut greater than 10% can, in some circumstances, qualify – the employee can stay and sue the employer for the pay difference over the employee’s reasonable notice period. The employee does not even need to leave at the end of the reasonable notice period – although if the employee stays after the notice period, he or she will have accepted the lower pay level. As such, pay cuts may not result in savings to the employer until the end of each employee’s reasonable notice period.

The lesson for employers who wish to impose immediate pay cuts is to either convince employees to accept the pay cut immediately, for the good of the company and the security of their jobs, or to ensure that the pay cut is small enough as to not be a constructive dismissal. Otherwise, the employer will need to provide reasonable notice of termination and impose the pay cut at the end of the notice period.

Russo v. Kerr Bros. Limited (Ontario Superior Court)