It has generally been accepted that an employer is permitted to change unilaterally a term or condition of employment, including compensation and benefits, by providing reasonable notice of the change to affected employees. However, in a recent decision, the Court of Appeal of Ontario held that, where an employee does not consent to changes to his/her terms of employment, an employer can make unilateral changes only if it precedes them with reasonable notice of termination and offers re-employment to the employee on the new terms.
In Wronko v. Western Inventory Service Ltd., [2008] O.J. No. 1589 (C.A.), the plaintiff Vice President had negotiated a two-year severance provision in the event of his dismissal without cause. When a new company President was appointed in 2002, the President reviewed all employment contracts in place and sought to reduce the severance provision in Mr. Wronko's employment agreement to two weeks per year of service to a maximum of 30 weeks. Not surprisingly, Mr. Wronko refused to sign any amending agreement. Accordingly, in September 2002, the new President sent Mr. Wronko a letter which explained that after a period of 24 months, the employer would unilaterally amend the employment agreement to provide the lesser termination provision. Mr. Wronko continued to object to the amended termination provision over the next two years. Two years later, in September 2004, the new President sent Mr. Wronko an email indicating that the original contract signed in 2000 was no longer valid and that payments on termination would be limited to 30 weeks. He also indicated to Mr. Wronko that if he continued to refuse to sign the amended agreement, "then we do not have a job for you". Mr. Wronko replied that he understood his employment to be terminated and did not report to work. Mr. Wronko then sued for wrongful dismissal.
Lower Court Decision
The trial judge identified the real issue as being whether the employer had a unilateral right to vary the termination provision in an employment contract upon reasonable notice to the employee. Relying on the Supreme Court of Canada judgement in Farber v. Royal Trust Co., and cases which have followed it, the trial judge held that an employer may make unilateral, fundamental changes to the terms and conditions of the employment relationship if it gives reasonable notice of these changes.
In this case, the period of 24 months was considered more than adequate notice of the change and the amended termination language was valid. Accordingly, it was held that although Mr. Wronko had no intention of resigning, his decision to do so could not be considered a constructive dismissal. In the result, the trial judge dismissed all the claims for damages, except a claim for unpaid vacation pay.
Court of Appeal's Decision
The Court of Appeal saw the issues differently, ruling that the trial judge erred in treating this case as an action for constructive dismissal as in the Farber case. The Court held that the two issues were essentially: whether the September 2004 correspondence constituted a termination of the employment relationship by the employer; and, if so, what consequences flowed from this termination.
Relying on the 1957 Court of Appeal case of Hill v. Peter Gorman, the Court explained that there are three options available to an employee when an employer attempts a unilateral amendment to a fundamental term of a contract of employment:
- The employee may accept the change in the terms of
employment, either expressly or implicitly through apparent
acquiescence, in which case the employment will continue
under the altered terms.
- The employee may reject the change and sue for damages if
the employer persists in treating the relationship as subject
to the varied term. This course of action would now be termed
a "constructive dismissal".
- The employee may make it clear to the employer that he or
she is rejecting the new term, but continue to work.
With respect to the third option, the employer may respond to this rejection by terminating the employee with proper notice and offering re-employment on the new terms. If the employer does not take this course and permits the employee to continue to fulfill his/her job requirements, then the employee is entitled to insist on adherence to the terms of the original contract.
Based on the above, the Court ruled that, having been made aware of Mr. Wronko's refusal to accept the new contract, the employer had two choices. It could advise Mr. Wronko that his refusal to accept the new contract would result in his termination, and that re-employment would be offered on the new terms. Alternatively, it could accept that there was no new contract and allow Mr. Wronko to continue working under the existing terms.
The Court concluded that, having failed to terminate Mr. Wronko's employment in 2002, and offer reemployment on the new terms, the employer must be taken to have accepted that the terms of the original contract remained in effect. In the Court's view the September 2004 email was an ultimatum, resulting in a termination by the employer. Accordingly, Mr. Wronko was entitled to two years' termination pay pursuant to his original contract. Conclusion
Conclusion
The Wronko decision makes it clear that providing reasonable notice to an employee of a fundamental change to his/her terms of employment, may no longer be sufficient. Where an employer wishes to amend fundamental terms of employment, such as compensation, pensions, benefits or termination provisions, the employer should continue to provide reasonable notice of the change. However, if an employee objects to the change, the employer may be faced with a wrongful or constructive dismissal claim.
Clearly, the risks of a successful claim are greater where an employment contract does not have an embedded amending power with respect to the specific term of employment. This is not usually the case with pension and benefits plans, as most plans have a right to amend expressly set out. Having said that, in all cases where an employee objects to a change, an employer should assess the risks and consider providing reasonable notice of termination of employment, and then offer to re-employ the individual under the new terms at the end of the reasonable notice period.
This may not be the final word on the Wronko case, as the employer intends to appeal the decision to the Supreme Court of Canada.
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