Canada: Recent Developments In The Law Of Constructive Dismissal: The Supreme Court Of Canada’s Decision In Potter v. New Brunswick Legal Aid Services Commission

The concept of "constructive dismissal" has been around for some time. We know that it can occur when an employer makes a significant change to a fundamental term or condition of an employee's employment without their consent. Examples can include changes (which could be deemed "fundamental") to the employee's work location or to the employee's position. Where there is a constructive dismissal, the employee either has the choice of accepting the change, or treating the conduct of the employer as a repudiation of the employment contract and commencing legal action.

In the recent case of Potter v. New Brunswick Legal Aid Services Commission, the Supreme Court of Canada reviewed the test for determining a constructive dismissal and, in doing so, highlighted the importance of dealing with change to the terms of an employees' employment properly.

Mr. Potter's Employment

Mr. Potter was employed by the New Brunswick Legal Aid Services Commission (the "Commission") as its Executive Director for a fixed term of seven years. About four years into his mandate, the relationship between Mr. Potter and the Commission deteriorated due to a number of unsubstantiated complaints against Mr. Potter. The parties began to discuss how to find a mutually agreeable means to bring Mr. Potter's contract to an end by way of a buy-out.

Before the negotiations concluded, Mr. Potter took time off for medical reasons. Approximately one week before he was scheduled to return to work from his medical leave, the Commission wrote to him and directed him to stay at home until further notice. He was advised that his salary would be continued in the meantime. However, by letter of the same date (and unknown to Mr. Potter) the Commission wrote to the Lieutenant Governor in Council (as Mr. Potter's appointment was made under New Brunswick's Legal Aid Act) recommending that Mr. Potter's employment be terminated for cause.

Mr. Potter commenced an action for constructive dismissal eight weeks later. On receiving the lawsuit, the Commission took the position that Mr. Potter had effectively resigned his position. The Commission therefore stopped Mr. Potter's salary and benefits.

The Litigation

The Court of Queen's Bench of New Brunswick and the New Brunswick Court of Appeal (the "lower courts") found that Mr. Potter had not been constructively dismissed. The trial judge found that the Commission's direction to Mr. Potter not to come to work merely reflected what he knew at the time, namely, that the Commission was willing to buy him out of his contract. The trial judge agreed with the Commission and found that Mr. Potter had effectively resigned his position when he commenced his lawsuit.

The Supreme Court's Decision

The Supreme Court disagreed and found that Mr. Potter had in fact been constructively dismissed. In reaching this conclusion, the Supreme Court articulated a two-part test to determine whether an employer's unilateral act breaches the employment contract:

1. Whether the unilateral act (in this case, placing Mr. Potter on administrative paid leave) breached a term of the employment contract; and

2. Whether the breach substantially alters an essential term of employment (whereby a reasonable person in the same situation would perceive that the breach was substantial).

In examining whether the suspension of Mr. Potter amounted to a breach, the Supreme Court reviewed factors considered by other cases that dealt with suspensions:

  • How long was the suspension? (Mr. Potter was not given a date of return and had been on leave for eight weeks before he brought his claim);
  • Had someone been appointed to replace him? (Mr. Potter's temporary replacement appointed during his medical leave had been assigned his duties during his suspension);
  • Did the employee receive his salary and benefits? (as highlighted by the lower courts, Mr. Potter was still in receipt of his salary and benefits up until the time he commenced his lawsuit);
  • Whether there is evidence that the employer intended to terminate the employee? (unlike both lower courts, the Supreme Court placed emphasis on the Commission's letter to the Lieutenant Council in Governor recommending the termination of Mr. Potter's employment); and
  • Whether the employer intended to suspend the employee in good faith for bona fide business reasons? (the Supreme Court noted that Mr. Potter had a statutory obligation under the Legal Aid Act to carry out his job duties).

As well, the Supreme Court focused on whether Mr. Potter had been told of the reasons for his suspension, which it determined he had not. By failing to give any basic reason for the suspension, the Supreme Court concluded that the Commission was not forthright with Mr. Potter and cited its earlier decision in Bhasin v. Hrynew in support of the conclusion that parties have a duty to be honest, reasonable, candid and forthright in contractual relations.

The Award

While recognizing that an analysis of whether a suspension can amount to a breach of the employment agreement requires careful consideration, the Supreme Court reached the conclusion that it did amount to a breach in this case and therefore held that Mr. Potter's employment had been constructively dismissed. Mr. Potter was awarded the remaining 33 months of his employment contract, or approximately $485,000.00, plus his pension and his legal costs throughout the legal proceedings. These are significant damages in the circumstances.

Lessons for Employers

While the decision deals with an administrative suspension, it highlights the need for employers to be very careful when dealing with those situations where there could be a "fundamental" change to the terms and conditions of an employees' employment. Coupled with the application of the principle of "good faith," employers should consider the following "best practices":

  • Look to the employment agreement (if one exists). Does it provide the right to suspend/ lay-off? If not, consider including this right in future agreements.
  • Be clear, be confidential and exercise discretion and good faith. A change in employment terms can be traumatic to an employee. Recognize there might be push back or perhaps even "sick time" as a result.
  • Consider giving notice of any change to the terms and conditions of employment. Provide consistent salary and benefits during this period, which could include a leave, and explain the reason for any change or suspension, especially if it is for legitimate business reasons.
  • If there is a change to the job function, or the employee is being asked to change his/her job, provide full details of the new/changed position, including duties, reporting structure and compensation.
  • Address any issues of stress or work environment immediately. Offer to meet or immediately deal with any such issues. Employees will not be expected to accept a change to their job when doing so can be deemed humiliating or they are being asked to work in a difficult/stressful or even poisoned work environment.
  • Provide notice that the employee is expected (particularly where compensation remains the same) to accept the job in order to mitigate any damages they might suffer from an alleged constructive dismissal.

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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