In the midst of economic uncertainty and widespread
cost-cutting, many employers are currently facing the challenge of
how to taper wage costs while avoiding constructive dismissal
claims. Can employers make modest changes to spare the bottom line
without generating significant exposure to termination claims?
The general rule of constructive dismissal is that an employer
cannot make changes to employee terms and conditions of employment
that are unilateral, fundamental, and negative. The exceptions to
this general rule include where:
there is consent to the change;
there is acceptance of the change after the fact;
there is reasonable advance notice of the change or notice
consistent with terms of an agreement (e.g., the employment
agreement allows for changes on certain specified notice, although
caution should be taken with this approach);
changes are not fundamental;
changes relate to matters within the employer's
you make the changes in exchange for something else of value to
the employee (e.g., a pay increase, promotion, benefit, etc.).
Employers have many options available to them that are in line
with these exceptions. First is to see if changes can be made that
are not objectively viewed as being fundamental. An example of
interest these days is across-the-board compensation or benefit
changes that are negative, but modest, as a cost-cutting
Although constructive dismissal is a grey area, it is most
easily found in cases involving compensation reductions, because
compensation is usually the most essential term of employment for
employees. However, some compensation reductions have been
accepted. Some cases have found that reductions in remuneration of
less than 10 - 15% (without more) are not fundamental breaches;
however, caution must be exercised.
Reductions in hours may also be possible without constituting
constructive dismissal. This is more easily done for wage-earning
employees rather than salaried employees. In the recent case of
Bonsma v. Tesco Corp., the Alberta Court of Appeal held
that a reduction in hours did not constitute constructive dismissal
because there were no guaranteed hours. Other cases have found
requiring employees to reduce their weekly hours by 20% or more did
constitute constructive dismissal.
In Otto v. Hamilton & Olsen Surveys Ltd., the
Alberta Court of Appeal found that "reductions in the benefit
package due to external economic pressures, but where salaries are
maintained, have consistently escaped characterization as
fundamental breaches." In that case, vacation was reduced from
6 weeks to 4 and the 5% employer RRSP match was eliminated. The
ability to reduce benefits generally would depend on the
significance of the benefits and the reductions in question.
Courts look at the amount of the reduction, the economic
situation of the employee, as well as the portion of the overall
remuneration package that is being affected. Economic pressures do
not protect an employer from the principles of constructive
dismissal, but they will be considered. The threshold for this
inquiry depends on individualized factors.
Notifying employees that negative changes will be made to their
terms and conditions of employment has long been thought to protect
against liability. Often it does. However, there are technical
aspects of how to properly deal with such notice that are critical
to protecting employers. In 2008, the Ontario Court of Appeal set
out the proper approach. In Wronko v. Western Inventory Service
Ltd., the Court stated that an employee has three choices when
faced with unacceptable changes to terms and conditions of
accept the change in the terms of employment;
reject the change and sue for constructive dismissal; or
clearly reject the new terms and continue working. If that
happens, the employer may respond 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 or her job requirements, then the employee
is entitled to insist on adherence to the terms of the original
If there is a constructive dismissal, employers have the ability
to offer continued employment under the new terms as a way for the
employee to mitigate any damages. There may be an obligation upon
the employee to accept such offers where not demeaning and where
reasonable in the circumstances.
In looking to trim employee costs without terminating employees,
employers should aim for changes that are not fundamental, seek
agreement, or terminate the terms in accordance with proper notice.
When all else fails, mitigation or litigation may be the
Alberta is going through a difficult economic period. These times can be challenging and while owners struggle to get their business through the rough patch, they want to preserve the assets and capital they have built up.
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