Don’t Get Sued by Your Employee: Constructive Dismissal

You’ve probably heard of it before: constructive dismissal. It’s that idea that, if you (as an employer) unilaterally change a fundamental aspect of the employment relationship with an employee, they can leave and sue you for damages. Why? Because you (as an employer) changed something fundamental without giving them the notice that they are required to by law. It’s something that every dentist needs to know about and fear. And in this blog, I’m going to get into the nuances of the doctrine of constructive dismissal. By the end of this blog, you’ll know a lot more about constructive dismissal; but always seek professional advice when dealing with your relationships (e.g. hiring, terminating and everything in between) with staff.

Legislation

Let’s start off with the relevant sections of the Employment Standards Act, 2000 (the “ESA”).

According to section 54 of the ESA, an employer cannot terminate an employee who has been continuously employed for 3 months or more unless the employer either (a) gives the employee written notice of termination; or (b) gives the employee pay in lieu of notice of termination.

Section 56 of the ESA states that termination for the purposes of section 54 can happen in one of 3 ways:

1. The employer fires the employee or otherwise refuses or is unable to continue employing them; or
2. The employer “constructively dismisses” the employee and the employee resigns from their position in response to the dismissal within a reasonable period; or
3. The employer lays off the employee for a period longer than the period of a temporary layoff.

The words “constructive dismissal” though used many times throughout the ESA are not defined in that Act. Section 141 (1) of the ESA states that the Lieutenant Governor in Council may make regulations “prescribing what constitutes constructive dismissal” but, as of yet, no such regulation exists.

We must turn to the case law to find out how the common law has defined the words “constructive dismissal” and the test to establish that a constructive dismissal has occurred.

What Constitutes Constructive Dismissal?

What constitutes constructive dismissal is hard to pin down consider that each case of constructive dismissal must be judged on its own facts. In fact, constructive dismissal is so fact-specific that judges have refused to certify class actions alleging constructive dismissal as inappropriate: see Kafka v. Allstate Insurance Co. of Canada, 2011 ONSC 2305 (CanLII), Ontario Superior Court of Justice, April 12, 2011 (Horkins J.); affirmed, 2012 ONSC 1035 (CanLII), [2012] O.J. No. 1520 (Div. Ct.).

That said, a few general principles have emerged from the case law:

• Unilateral Substantial Change to Term of Employee Contract
• Fundamental Breach of Contract

Unilateral Substantial Change to Term of Employee Contract

The leading authority regarding constructive dismissal in Canada remains the 1997 Supreme Court of Canada decision in Farber v. Royal Trust Co., [1997] 1 S.C.R. 846, where it was held that:

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 constructively dismissed. By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and the employee can 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…

Offering new employment terms and insisting on their acceptance by the employee may amount to constructive dismissal.

In Wronko v. Western Inventory Service Ltd., [2008] ONCA 479, the employer attempted to have a senior manager, Wronko, sign a contract that reduced his notice period from 2 years to 30 weeks. Wronko refused to accept the changed term and as a result was told in a memo that he is getting 104 weeks’ (i.e., two years) notice that the termination provision in his employment contract would be changed to provide that upon termination of his employment, other than for cause, Wronko would be entitled to three weeks’ notice or pay in lieu thereof for each year of employment, to a maximum of 30 weeks.

Despite the purported “notice” given to Wronko, the Court of Appeal held that the employee was wrongfully dismissed. The Court of Appeal said that when an employer attempts a unilateral amendment to a fundamental term of a contract of employment, an employee has three options:

1. they may accept the change in the terms of employment, in which case the employment will continue under the altered terms;
2. they may reject the change and sue for damages if the employer persists in treating the relationship as subject to the varied term; or
3. they may make it clear to the employer that they are rejecting the new term.

The employer may respond by:

1. terminating the employee with proper notice and offering re-employment on the new terms; or
2. permitting the employee to continue to fulfill his or her job requirements, in which case, the employee is entitled to insist on adherence to the terms of the original contract.

Having been made aware of Wronko’s opposition to the new contract and his continued opposition afterwards, the employer could have advised the plaintiff that his refusal to accept the new contract would result in his termination and that re-employment would be offered on new terms. If it had taken that position, the termination provision in the original contract would have been triggered. Alternatively, the defendant could have accepted that there would be no new agreement and that the plaintiff’s contract would continue on the existing terms. As the defendant did not choose the former course, it must be taken to have acquiesced to Wronko’s position and to have accepted that the terms of the existing contract remained in effect.

Similarly, it has previously been found that an employer’s unilateral change in an employee’s contract of employment from one of indefinite hiring to a fixed-term contract can amount to constructive dismissal: see George v. Imagineering Ltd., 2001 CanLII 28311 (ON SC). Demoting a regular employee (as opposed to one who is on probation) may constitute constructive dismissal due to change of one or more essential terms of the employee’s contract unless the employer has just cause to effect the demotion: Lowery v. Calgary (City), 2000 ABQB 859 (CanLII), 2000 ABQB 859, affirmed 2002 ABCA 237 (CanLII), 2002 ABCA 237. If an employer alleges incompetence as grounds for dismissal or demotion, it must prove the following (see Atkinson v. Boyd, Phillips & Co. Ltd. 1979 CanLII 478 (BC CA), (1979), 9 B.C.L.R. 255 (B.C.C.A.); Lowery v. Calgary (City), 2002 ABCA 237 (CanLII), 2002 ABCA 237 at para. 3):

1. The employee was given express and clear warnings about his performance;
2. The employee was given a reasonable opportunity to improve his performance after the warning was issued;
3. Notwithstanding the foregoing, the employee failed to improve his performance; and
4. The cumulative failings “would prejudice the proper conduct of the employer’s business”.

Fundamental Breach of Contract

In Farber, it was also recognized that where “one party to a contract demonstrates an intention no longer to be bound by it, that party is committing a fundamental breach of the contract that results in its termination.”

In Rowley v. High Strength Plates & Profiles Inc., 2011 ONSC 6221, it was stated that such repudiation occurs where the employer’s conduct creates a hostile work environment which renders the employee’s continued employment intolerable”. A court may find an employee has been constructively dismissed without identifying a specific fundamental term that has been breached, where the employer’s treatment of the employee makes continued employment intolerable.

In Lavinskas v. Jaques Whitford & Associates Ltd., 2005 CanLII 6377 (ONSC), Mr. Lavinskas was hired as an accounting manager by a senior employee at the company. Once the senior employee who hired Lavinskas left the company, the other superiors began to shush him during staff meetings and making managerial decisions for his department without notifying him first, he was then completely excluded from staff meetings. Senior staff reprimanded his staff and moved his staff without Lavinskas’ knowledge or presence. His staff began to see him as lacking authority and Lavinskas started losing control over his department. Eventually, Lavinskas got really depressed overwork and left on sick leave. He did not return but sued for termination pay due to constructive dismissal. It was held that, given all of the evidence, the only reasonable conclusion an employee in Lavinskas shoes could have come to is that the company did not want him and awarded him 6 months termination pay.

In Colasurdo v. CTG Inc., (1988), 18 C.C.E.L. 264 (Ont. H.C.), MacFarland J. found that an employee had been constructively dismissed where his authority was systematically eroded and it seemed that each day events happened to further diminish his role at the company. She noted that all of the events of which the employee complained, if viewed in isolation, were capable of reasonable explanation, inconsistent with the employer’s attempt to oust the employee; however, when all of the events were taken together, the only reasonable conclusion was that the employer had a design to reduce the employee’s role to such an extent as to leave him no alternative but to leave the company.

In Paitich v. Clarke Institute of Psychiatry, (1988), 19 C.C.E.L. 105 (Ont. H.C.), affirmed (2000), 30 C.C.E.L. 235 (Ont. C.A.), the court found that the reprehensible behaviour of the administration at the Clarke Institute of Psychiatry had rendered impossible the continued employment of a senior psychologist at the Institute. This was seen as constructive dismissal of the employee, even though the employee went on to display extreme insubordinate behaviour as a reaction to the administration’s treatment of him and that behaviour, standing alone, would have been just cause for dismissal. The Court of Appeal agreed with the trial judge that it would be unfair to permit an employer to rely on the employee’s insubordinate actions as constituting just cause for dismissal in circumstances where that behaviour was an understandable reaction to the employer’s earlier wrongdoing.

What Does Not Constitute Constructive Dismissal?

Implicitly or Explicitly Accepting the Change of Terms

When an employer unilaterally makes substantial changes to the employee’s terms of contract, the employee may accept the changes and continue the employment relationship under the new terms. In Munro v. Crispin Energy Inc., 2001 ABQB 279, it was held that a president and CEO of a corporation who was hired under an employment contract which was later changed by the directors to a lesser salary accepted the change as was reflected by (a) ample opportunity for him to speak up and complain or make his disproval of the change known and (b) he worked for 2 years before bringing the suit for constructive dismissal.

Rejection of the Change of Terms Not Made Within “A Reasonable Period of Time”

What constitutes “reasonable time” varies from case to case.

Several factors that are relevant in the calculation of reasonable time include the employee’s persistence in objecting to the unilateral change; the employee’s age, education and work experience; and the employee’s mitigation strategy: see Watson v. Seacastle Enterprises Inc., 2007 BCSC 365 (CanLII) at para 35.

In Russo v. Kerr Bros. Ltd., 2010 ONSC 6053 (CanLII), the employee remained on the job for 18 months prior to his wrongful dismissal claim going to trial. It was held that this did not mean the employee condoned the reduced terms or waive his rights to a constructive dismissal claim.

Types of Constructive Dismissal

Constructive dismissal, because it is so fact-dependent comes in various shapes and sizes, some of which are:

1. Demotion;
2. Change in reporting functions;
3. Change in job responsibilities;
4. Change in working conditions;
5. Reduced remuneration;
6. Changes hours of work;
7. Lay-offs and suspensions;
8. Relocation of place of work;
9. Reduction in employee status/prestige;
10. Change in geographic location;
11. Harassment;
12. Humiliating or poisoned work environment;

The Flip Side – Constructive Resignation

Constructive resignation occurs when the employee, by words or conduct, indicates to the employer that they no longer wish to be bound by, or to perform, their obligations under the employment contract.
For example, in Gould v. Hermes Electronics Ltd., (1978), 34 N.S.R. (2d) 321 (S.C.), the Nova Scotia Supreme Court found that an employee who wrote to his employer stating that he refused to perform his duties unless he receives a raise was rightfully dismissed for cause by the employer. The Court stated that his refusal to perform his duties was a repudiation of the contract.

An employee may also repudiate the employee contract by commencing a lawsuit against their employer, but there is no repudiation where the employer has already repudiated the employment contract by constructively dismissing them.

Bottom Line

The law on termination clauses is constantly evolving. It is always best to consult with an employment lawyer before including a termination clause in any employment agreement. If you have employment agreements that are outdated or not properly drafted, OR if you don’t have employment agreements at all, then please give us a call. We are happy to help with employment contracts, office policy manuals and any other employment issues. I am dedicated to helping dentists understand and minimize the risks associated with being an employer. Send DMC an email or give our Employment Law Team a call directly at 416-443-9280 extension 206.