Canada: Constructive Dismissal: A New Decision From The Supreme Court Of Canada

"Simply stripping an employee of work — but still paying and providing benefits to that employee without justification or communication — may open the door to a valid constructive dismissal claim and damages for wrongful dismissal, as much as an explicit dismissal."

Employers understand that the dismissal of an employee can fall into either of two categories:

  1. Explicit dismissal, where the employer decides to terminate the employment of an employee and so informs the employee; or
  2. "Constructive" (sometimes called "effective" or "deemed") dismissal, which occurs when the employer unilaterally changes a fundamental term of the employment relationship with the employee without explicitly terminating the person's employment.

In the case of constructive dismissal, the employer's unilateral actions are so detrimental to the employment relationship that the employer is demonstrating that it no longer intends to be bound by the terms of the employment contract (usually this means to provide work and pay). Where this occurs, the employee may stop coming to work and may successfully sue the employer for damages for wrongful dismissal.

In the recent case Potter v. New Brunswick Legal Aid Services, 2015 SCC 10, the Supreme Court has ruled that a non-disciplinary suspension of an employee with pay can amount to constructive dismissal. Justice Richard Wagner's lengthy decision for the five-judge majority of the Court is noteworthy because it has clarified the law of constructive dismissal. The case is also a clear warning to employers that they must communicate openly and honestly with employees or, in the case of a suspension with pay, risk being held to have constructively dismissed the employee. Employers should also note that a suspension must be justified by a legitimate business reason.

The Supreme Court overturned the judgments of two New Brunswick lower courts that had held that Mr. Potter, the plaintiff-employee, had not been constructively dismissed, but rather had resigned from his employment by starting a constructive dismissal lawsuit against his employer. The two-judge minority of the Supreme Court, Justice Cromwell and Chief Justice McLachlin, agreed with the majority that Mr. Potter had been constructively dismissed, but took a different view of the legal test for constructive dismissal.

Facts

Four years into a seven-year appointment as the Executive Director of the Legal Aid Program in New Brunswick, the employment relationship between Mr. Potter and his employer became strained. While the employer, the Board of Directors of Legal Aid, was in buy-out negotiations with Potter, Potter went on an approved medical leave.

One week before Potter was set to return to work, the Board sent a letter (the "Cause Letter") to the Minister of Justice recommending that he be dismissed for cause. The Board never told Potter that it had sent this letter.

That same day, the Board suspended Potter from work, with pay, and told Potter's lawyer that Potter should not return to work "until further direction". The lawyer asked for clarification, but the Board gave no explanation for the suspension, simply replying that: "[h]e is not return to until further notice". The Board still did not disclose the Cause Letter.

Eight weeks into his suspension, Mr. Potter started a lawsuit for constructive dismissal. The employer then took the position that Potter had resigned when he issued the claim. The Cause Letter, it seems, came to light after the litigation began.

The lower courts

Both the trial judge and the New Brunswick Court of Appeal held that the Board had not constructively dismissed Mr. Potter by suspending him from work.

The trial judge took a narrow view of the evidence that a court may consider in assessing whether constructive dismissal had been established: only information that the employee knew at the time of the alleged constructive dismissal. As a result, the judge held, Mr. Potter could not rely on the Cause Letter that, it seems clear to us, would convince a logical observer that the Board was effectively dismissing him.

The Court of Appeal doubted the trial judge's view that only facts known to the employee could be considered. Strangely, however, the appellate court stated that if it was an error, then it was a "wholly harmless" one and did not affect the outcome. The Court of Appeal therefore dismissed the appeal.

The Supreme Court overruled the lower courts and found the suspension constituted constructive dismissal

In his Supreme Court decision, Justice Wagner clarified the test for constructive dismissal from the earlier case of Farber v Royal Trust Co. [1997] 1 SCR 846. The two branches of the test – discussed below – are now to be clearly separated and treated independently.

The Supreme Court also indicated that employers must:

  1. maintain a basic level of honest and forthright communication with employees that are being suspended, and refrain from acting in secret and stonewalling the employee as in Mr. Potter's case; and
  2. demonstrate that a non-disciplinary suspension is reasonable and justified.

The test for constructive dismissal clarified

The upshot of the re-statement of the test is that the two branches of constructive dismissal are distinct. The first branch has two distinct steps within it.

Branch (1) The court determines whether the employer's unilateral conduct breached the contract in a manner that substantially altered the essential terms of the contract. This is a two-step analysis.

Step (i) Did the employer unilaterally breach an express or implied term of the contract?

  • The Court takes a strictly objective view at this stage, considering all available evidence, rather than only the subjective knowledge of the affected employee.
  • In the case of a non-disciplinary suspension, the onus shifts to the employer to show that the breach was reasonable and justified; in other words, that there was a legitimate business reason for suspending the employee.
  • Step (ii) If the employer breached the employment contract, did the breach substantially alter an essential term of the contract?
  • The test is whether a reasonable person in the same situation as the employee would have perceived that the employer's conduct had resulted in a substantial change to the contract.
  • Because the perspective is subjective/objective, the court may consider only the actual knowledge that the employee at the time when s/he claimed constructive dismissal, or what was reasonably foreseeable.

Branch (2) Did the employer's conduct evince an intention to no longer be bound by the contract, from the perspective of the reasonable person?

Application of the test to the facts of the Potter case

Branch (1), step (i): Was there a unilateral change that amounted to a breach of contract? Answer: yes. The court found that there was no express authority in the contract to suspend the employee. There was no implied authority to do so either because the Board had a duty to provide the employee with work. Here, at the objective step of the test, the court considered the Cause Letter, but only for the purpose of determining whether the contract had been breached. The Cause Letter was excluded from consideration at the second step (whether a reasonable person would feel that the breach had substantially altered the contract). The Supreme Court said that the trial judge had erroneously skipped the first step and had considered only the second step. Unlike the Court of Appeal, the Supreme Court did not find this error to be "wholly harmless".

Importantly, the employer still has the onus to show that a suspension with pay is reasonable and justified. Even if there had been an implied authority to suspend, the employer would have failed to meet its onus. No employer has an unfettered right to suspend an employee for non-disciplinary reasons. The right is "subject to the basic requirement of business justification" (paragraph 75). The employer also failed to meet the basic requirement to be honest and forthright because an "administrative suspension cannot be found to be justified in the absence of a basic level of communication with the employee" (paragraph 99).

Branch (1), step (ii): Would a reasonable person in Mr. Potter's shoes perceive that the decision to suspend him substantially changed essential terms of his contract? Answer: yes. From Mr. Potter's point of view, he had been suspended for an indefinite period and had never been told why, which was enough to discharge Mr. Potter's burden. The court did not consider the Cause Letter in this step because Potter had not known about it at the time. Nonetheless, the court had no difficulty in finding that because he never knew why or for how long he was being suspended, it was reasonable for Potter to perceive that his employment contract was being substantially altered (paragraph 105).

Branch (2): Did the breach of contract show that the employer no longer wished to be bound by the contract? Answer: yes. Although it emphasized the clear separation of the two branches of the test, the Supreme Court arguably merged the two branches when it stated that in cases of an unauthorized suspension, it is "inevitable" that the suspension will amount to a substantial change. Justice Wagner implied that in some cases, once the first branch is passed, the second is easy:

"If the employer is unable to show the suspension to be reasonable and justified, there is little chance, to my mind, that the employer could then turn around and say that a reasonable employee would not have felt that its unreasonable and unjustified acts evinced an intention no longer to be bound by the contract. Any exception to this rule would likely arise only if the unauthorized suspension was of particularly short duration" (Emphasis added, paragraph 106).

The minority's view

Justice Cromwell, writing for the two-judge minority, agreed that Mr. Potter had been constructively dismissed, but disagreed with how the majority reached its conclusion.

Justice Cromwell argued that a court should take into account all circumstances that existed at the time of the alleged dismissal, whether or not they were known to the employee. The Cause Letter was therefore relevant and should have been admitted at each step of the test. The inescapable conclusion, when one considers that the Board recommended that the employee be dismissed for cause, was that the Board was attempting to dismiss the employee and had intended not to uphold its side of the contract (paragraph 165).

Conclusion

Simply stripping an employee of work, but still paying and providing benefits to that employee, without justification or communication, may open the door to a valid constructive dismissal claim and damages for wrongful dismissal, as much as an explicit dismissal.

Employers should keep a basic line of communication open with an employee who is being suspended for non-disciplinary reasons, because they must act in good faith. Employers must show that any suspension is reasonable and justified, which requires a legitimate business reason. Keeping an employee in the dark will hardly amount to good faith or be tied to a legitimate business reason.

If an employee is to be suspended, the employer should tell him or her why, have a legitimate business interest to protect, and be sure that the contract authorizes the contemplated suspension. There is no implied authority at law to put an employee on non-disciplinary suspension without a legitimate reason. Therefore, employers may want to draft employment contracts that would show an implied authority to do so, or include an express suspension clause in the contract.

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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