Recently, a reader asked me whether cutting back the hours of a department of hourly paid employees by about 5 hours a week for a few months would create any problems. She correctly identified constructive dismissal as the issue to consider.
What is Constructive Dismissal?
“Constructive dismissal” is when an employer unilaterally makes such substantial changes to the employee’s contract so as to breach the terms of the contract, amounting to an indirect termination.
For anyone who has seen the movie Office Space (and everyone absolutely should), dear Milton is the classic case of constructive dismissal. Rather than firing him – or for that matter, trying to figure out what he actually did at the company, since he had been laid off a few years earlier, but continued to be paid through a payroll glitch – they gave him progressively demeaning conditions of work to the point where they relocated his office to a corner of the basement with leaky pipes, no phone or stapler, and piles of boxes and supplies around his desk.
With slightly more precedential weight, the oft-cited Supreme Court of Canada case, Farber v Royal Trust Company explains constructive dismissal as follows:
24. Where an employer decides unilaterally to make substantial changes to the essential terms of an employee’s contract of employment and the employee does not agree to the changes and leaves his or her job, the employee has not resigned, but has been dismissed. Since the employer has not formally dismissed the employee, this is referred to as “constructive dismissal”. By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and is therefore terminating the contract. The employee can then treat the contract as resiliated for breach and can leave. In such circumstances, the employee is entitled to compensation in lieu of notice and, where appropriate, damages.
Practically speaking, an employee traditionally had to repudiate the revised terms by leaving the job and then sue for damages after the fact. The risk to an employee is very high, since they may be resigning from an employer who in fact had no intention of firing him or her, but rather, simply made some changes to the business about which the employee was unhappy.
This area of the law is evolving, and some recent cases suggest an employee may be expected to stay on to mitigate his or her losses while looking for another job if the atmosphere is not hostile or embarrassing (e.g. Evans v Teamsters Local Union No. 31). As well, in Wronko v Western Inventory Service Ltd, the Ontario Court of Appeal held that simply providing notice of fundamental terms may no longer be sufficient to avoid a claim of constructive dismissal.
The Employment Standards Legislation
The Ontario Employment Standards Act provides that constructive dismissal is a “termination” under section 54 if:
56(1)(b) the employer constructively dismisses the employee and the employee resigns from his or her employment in response to that within a reasonable period.
An employer found to have constructively dismissed an employee is therefore liable for the same statutory termination and severance pay amounts as required for general terminations.
Examples of Constructive Dismissal
In addition to the demeaning actions against Milton, examples of constructive dismissal include:
- unilaterally revising an employee’s contract to introduce a very narrow termination clause without consideration (i.e. without something in return, such as a bonus payment);
- revising an employee’s job description to remove significant aspects such as supervising a team or leading an important ongoing part of the business; or
- moving an employee from a corner office to a cubicle.
More obviously, any decrease in compensation usually triggers the risk of constructive dismissal. Examples include:
- moving an employee from straight salary to a lower salary with commission;
- changing positions into a lower pay scale;
- transferring an employee to a jurisdiction with a higher cost of living but no salary increase;
- removing a car bonus; or
- cutting hours.
Can you Decrease a Department’s Hours?
So what about slightly decreasing an entire department’s hours temporarily? This is a common strategy in our struggling economy. Assuming the department is not comprised of only one, otherwise poor performing or problematic employee, and assuming the decrease is small and temporary, a department-wide slight and temporary decrease of hours based on an objective business decision should be fine. Yes, there is a risk, but not significant, primarily because no individual is being targeted.
In addition to whether an individual is being targeted, the caselaw looks at the impact on the employee’s wallet at the end of the day. Very generally, if the decrease or change in compensation scheme amounts to an overall compensation cut of over 10%, you can be sure there is a constructive dismissal claim. Anything under 5%, particularly if backed up by objective, strong business reasons, is usually okay. The 5-10% range enters into a danger zone, and will depend on the context and surrounding factors in each situation.
Of course, all of the above is subject to any terms or conditions found in an employment agreement that speaks to the company’s right to make changes to the position in question.
Tips for Employers
Communication is the key. Employees know the economy is still tough, and most would prefer a job with small modifications than to have no job at all. In my experience, constructive dismissal claims arise more from an employee who felt pushed out, hurt and angry, rather than any true complaint of a decrease in salary or responsibilities.
Communicate the business reason for the change and provide as much notice as the business can bear. Reassure the employee(s) that the company is happy with his or her work, but is forced to make some hard business decisions. Study after study shows that employee satisfaction is based more on being valued and playing a meaningful part of the organization than on whether he or she receives a 50 cent raise this year.
And for goodness sake, try and avoid issuing a press release the next day that reports the company is enjoying an excellent quarter and top bonuses are scheduled to be paid to management as a result of top profits.
If you, in fact, have every intention of pushing an employee out the door and hope that he or she will quit so you are off the hook for termination and severance pay, you may want to rethink your strategy. Aside from issues of workforce morale and employee productivity, particularly nasty constructive dismissals may also face the risk of bad faith damages.
How has your workplace been dealing with the ongoing recession crunch? Any tips you’d like to share on how your organization has creatively weathered the storm?