Changing employment contracts without triggering constructive dismissal

June 10, 2014 9:32 am Views: 26

There is no denying the importance of a well-drafted employment contract that clearly establishes the parameters of an employment relationship. Once an employment contract is entered into, an employer’s unilateral changes to those parameters can present legal risks. The concept is called “constructive dismissal” and it applies where the employer unilaterally changes the employment relationship in a fundamental way. As a result of the change, the employee can claim that he or she has been constructively dismissed and may seek damages for wrongful termination. The threshold question in all claims of constructive dismissal is whether the employer’s alteration of the employment rela- tionship constitutes a fundamental change. Changes to overall compensation, significant geographic relocations, and changes to duties can all be considered “fundamental” and trigger constructive dismissal. This determination depends on the specific facts of each case and the impact of the employer’s change on the individual.

Employers may still unilaterally change employment terms without triggering constructive dismissal provided they follow the guidance set out in the Supreme Court’s 1997 decision in Farber and the 2008 Ontario Court of Appeal decision in Wronko. In Farber, Canada’s top court held that an employer may unilaterally alter the terms of employment without triggering constructive dismissal, provided that the employer gives reasonable notice to the employee. This general rule was modified somewhat by the decision in Wronko which held that if an employee rejects the fundamental change, the change could no longer be imposed unilaterally by merely providing notice. Wronko had been provided with two year’s notice that his employer intended to reduce the severance pay owed to him at termination under his employment contract. Wronko clearly indicated that he rejected the change and continued to work.  The employer was ambiguous as to whether the change would actually be implemented following the notice period. Once the notice period had passed the employer attempted to implement the change and Wronko treated this as constructive dismissal, seeking damages based on his original employment contract. The Court of Appeal found that Wronko had been constructively dismissed and outlined three possible outcomes once an employee has been advised that the terms and conditions of his or her employment will change:

1. The employee may accept the change and the employment will continue under the altered terms;
2. The employee may reject the change and sue for damages if the employer treats the relationship as subject to the new terms of employment;
3. The employee may clearly reject the new term in which case in order to implement the change, the employer must terminate the employment with proper notice and offer re-employment on the new terms.

Some viewed the Wronko decision to mean that employers could no longer simply provide reasonable notice of fundamental changes to terms of employment prior to implementation.

However, the impact of the Wronko decision may have been narrowed by the more recent decision of the Ontario Divisional Court in Kafka (2012).

In Kafka, the employer announced changes to employees’ compensation and sent a letter to all employees indicating that the changes would take effect in 24 months. Those employees who refused to accept the changes resigned and commenced a class action for constructive dismissal. The Divisional Court discussed the Wronko decision and concluded that it had not changed the law of constructive dismissal as reflected by Farber. The Wronko decision turned on its particular facts – primarily that the employer was ambiguous as to its intention to implement the changes following the passing of the notice period. In contrast, the employer in Kafka was very clear that the changes would be implemented following the 24-month notice period.

In order to avoid triggering constructive dismissal, employers should ensure that the employment contract contemplates changes to its terms. Where an employer wishes to change the employment contract, the consent of the employee should be sought. If consent cannot be obtained, employers must ensure that they are clear and unambiguous that the change will be implemented following the notice period. This may be achieved by terminating the employment with proper notice, and offering re-employment on the new terms.

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