Canada: How A Corporate Reorganization Can End Up Being A Constructive Dismissal Lawsuit

Last Updated: July 21 2014
Article by Howard Levitt

With Damocles' sword of constructive dismissal lawsuits looming over employers who wish to reassign staff, even a minor misstep can prove costly.

A promotion to vice-president of operations with General Coach Canada, a manufacturing company in Henshall, Ont., was a remarkable achievement for Ken Farwell, who had started out as a general labourer and rose to become a member of the three person executive team responsible for operating the plant.

But his ascendancy was short lived. Roger Faulkner, the vice-president of sales and marketing, chafed under this collective structure and was able to persuade the U.S. head office to appoint him vice-president and general manager of the plant with Farwell reporting to him. Shortly thereafter, Faulkner was named president with overall responsibility for the Henshall facility.

The impact on Farwell was immediate. Faulkner decided to return him to the role of purchasing manager, a position he had held 16 years earlier. To add insult to injury, Farwell would be reporting to a former subordinate who would become the operations manager. Faulkner urged Farwell to accept the job as purchasing manager and to help script the announcement of the new positions to staff. Humiliated by the changes, Farwell rejected both requests. Farwell left the premises immediately after his successor was announced and was unable to return to work. He fell into deep depression and eventually sued for constructive dismissal.

Both the trial judge and the Ontario Court of Appeal ruled that the demotion to purchasing manager from vice-president of operations amounted to a constructive dismissal.

But the analysis did not (and generally does not) end there. General Coach argued that the changes were motivated by pure economics and were not driven by animus. Faulkner had attempted to dissuade Farwell from leaving. His direct report had new product expertise that was the new focus of the business and it made sense to promote him. Farwell had no rational reason to simply walk out and sue.

The Ontario Court of Appeal allowed that General Coach's arguments had merit and Farwell might well have been obliged to stay on in the new job, if a critical step had not been missed. After Farwell rejected the new position, General Coach should have nonetheless reoffered it to him. In this way, Farwell would have been given the opportunity to stay on and mitigate his damages. Because Farwell was simply allowed to leave and no offer was extended, General Coach was stuck with an award of 24 months' pay and legal costs.

This case illustrates the care that needs to be taken in corporate reorganizations:

Use employment agreements Had General Coach incorporated a standard provision in its contracts, giving it the discretion to reassign staff to meet changing business needs, Farwell would not have been able to sue.

Avoid humiliating staff In reconfiguring an organization, try to maintain the dignity of long-term employees. The courts, as is evident in this decision, are sensitive to their status and apt to tilt judgments in their favour.

Appearances matter Ensure affected staff are not excluded from decision-making sessions; maintain their original or equivalent titles; keep their perks such as the corner office. These steps reduce the risk of a finding of constructive dismissal.

Reiterate offers Even if an employee balks at accepting a reassignment, and maintains it is a constructive dismissal, repeat the offer.

Be strategic Consider simply re-assigning the employee and refrain from seeking their consent. If they refuse, remind them that persistent refusal will amount to job abandonment and that they will be disentitled to severance. After all, "offering" someone a position implies they have the right to say no. Assigning a new position implies its refusal connotes abandoning employment. Many employers err in not recognizing that distinction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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