Constructive Dismissal Can Be Costly

Owning a business brings a sense of pride. You, perhaps with a group of other owners, have created a source of income, gained customers you can help and hired employees who earn a livelihood. You have created an economic organism, and it can be an empowering experience.

It becomes even more rewarding when your employees identify with the business. Your creation has become a part of their identity. They take pride in their workplace accomplishments and how these profit your business and themselves. Their work is important to them. In the words of a former Chief Justice of the Supreme Court of Canada:

Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.

Given the importance work plays in a person’s life, it is not surprising that courts limit an owner’s ability to change the employment relationship. An employer cannot make a unilateral fundamental change to an employment contract. If an owner tries and the employee resists the change to the point of quitting their job soon after the change is implemented, the owner may be liable for constructive dismissal. Legally, a constructive dismissal is as wrongful as the firing of an employee without cause.

A judge’s interpretation of fundamental depends on the circumstances, but reductions in pay, demotions and geographic transfers have been ruled constructive dismissals. Substantially reducing an employee’s pay will hurt the employee’s means of financial support and a demotion may be humiliating. That these can be considered constructive dismissal would not surprise most people.

However, a constructive dismissal is not always so obvious. A good faith decision by an employer that fundamentally changes an employee’s employment may create liability. The intent of the change might even be to benefit the employee. For example, an owner may roll out a new performance-based compensation system for employees. This new system will benefit the business and could mean more money for employees. However, if it has a negative impact on a particular employee in that, for example, the employee’s base salary is cut, and the employee quits because of this, the owner may be liable for constructive dismissal.

There are no quick and easy fixes to avoid constructive dismissal. A term in the employment contract which gives the owner discretion to unilaterally make changes is a possibility, but there has been little judicial consideration of such terms. It is possible that judges may imply restrictions on an owner’s exercise of discretion, especially since employees’ rights enjoy strong protection by courts. Giving notice to an employee of the fundamental change is another option, but judicial opinion on this practice has been mixed. It has been interpreted as comparable to providing “reasonable notice” like a dismissal without cause, shielding the owner from liability. On the other hand, it has also been interpreted as being the very event giving rise to a constructive dismissal. Fixed term contracts may be an answer as new terms could be re-negotiated at the end of the contract. There are complications with these beyond the scope of this article, especially when it comes to employees who have entered into successive, similar contracts over many years.

Best practice is communication. A constructive dismissal only arises if an employee rejects the change and quits their employment. Discussing a contemplated change with an employee in advance, seeking their input and point of view and providing assurances to them may pave the way for a smooth change. If resistance is anticipated, the change should be reconsidered, or at least the risks should be factored in.

Although it is your business, your employees have an interest in and identify with your organization. Even well intentioned decisions may have a negative impact on a worker. Before imposing a change on an employee, explore all the angles, including seeking the employee’s input, to avoid unexpected and unnecessary liability.