Constructive dismissal in Canada

by Dentons
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Several jurisdictions around the world permit claims for what is known as “constructive dismissal” or “constructive discharge”. In some cases those claims arise from statute and in others they arise under common law. This article will discuss constructive dismissal from a Canadian law point of view as well as some of the current issues which relate to it.

When can an employee claim constructive dismissal?

Generally speaking, Canadian courts will recognize an employee’s right to claim constructive dismissal if an employer has made a unilateral and fundamental change to the employee’s terms of employment. Fundamental changes can include significant changes to position, duties and responsibilities, compensation and even job location. In addition, the case of an employer treating an employee in such a way so as to render the employment relationship untenable (such as harassing the employee) can be found to constitute constructive dismissal. As well, while unpaid suspensions have in the past been found to be possible triggers for constructive dismissal claims, a recent Supreme Court of Canada case found that even a paid suspension was a trigger for a constructive dismissal claim in a case where it was not reasonable for the employee to be suspended with pay and where the employee was not in agreement with the suspension. In essence, anything which significantly alters an employee’s essential terms of employment may constitute constructive dismissal.

Employers may need to tread carefully

This can of course be problematic for employers who may be seeking to restructure the workforce or even decrease costs. For example, it is often a shock for foreign parent companies to be told that they cannot unilaterally reduce the salaries of employees in their Canadian subsidiaries without concern. That is not to say that it can’t be done, but if done it requires a careful plan. Likewise, while some Canadian employment law statutes actually permit employers to send employees out on an unpaid temporary layoff for a short period of time if there is a lack of work or money, some Canadian courts have held that unless employees specifically agreed to be bound by those temporary layoff provisions in their employment agreements, the temporary layoff may actually constitute constructive dismissal even though it is permitted by statute. Again, employers need to tread carefully.

Reducing risk

If an employee believes that he or she has been constructively dismissed, that claim must be asserted very quickly after the fundamental change has been made by the employer, as it will otherwise be assumed that the change was accepted by the employee. Until relatively recently, the employee would then resign and seek damages, with the measure of damages for constructive dismissal being the same as for a wrongful dismissal claim. Luckily for employers however, there have been recent changes in the law which significantly reduce risk.

When an employee has been wrongfully dismissed, he or she is entitled to pay in lieu of notice for a reasonable period of time as dictated by statute, contract and/or the common law. That notice period is notionally intended to take the employee from their prior employment to new employment, and the employee has a corresponding duty to look for another job during the notice period in order to “mitigate” their damages. Given that the measure of damages for constructive dismissal is the same as for wrongful dismissal, there is a corresponding duty on employees claiming constructive dismissal to seek employment in order to mitigate damages. As such, if an employee claims constructive dismissal and the employer invites the employee to return to work during the notice period in order to mitigate damages, the employee generally has a duty to stay in the job until the notice period has ended. This then circumvents the need for a payout by the company to an employee who is no longer on the job. For employers, this is perhaps the single greatest development in the law of constructive dismissal, and it has put employers back on an even playing field with employees.

Mitigating damages

While employers can now request that an employee remain on the job to mitigate damages after making a constructive dismissal claim, there are legal requirements which go with that. First, the employer must make the invitation to the employee after the employee has formally alleged constructive dismissal. In other words, it is not enough for an employer making a fundamental change to employment terms to advise the employee at the time of the change that they can stay on and work out the notice period if they don’t like the change. Rather, a further written invitation to remain on the job must be made after the constructive dismissal claim has been alleged.

Second, there are times when an invitation to remain on the job in order to mitigate damages is not reasonable and will not be required by the courts. One example is the harassment example set out above. If an employee is being harassed on the job, he or she will generally never be required to work out the notice period, in which case damages are the appropriate remedy. Similarly, if an employee is being asked to move a significant distance (for example, from Canada to Europe), the requirement to take the job in Europe and work there through the notice period is not reasonable. As a result, if an employer knows that an employee is unlikely to want to agree to new fundamental terms of employment, it is often best to lay out the new terms before they need to take effect, so that the employee can mitigate damages in their old position. For example, an employee being asked to take a 20 percent pay cut should probably be permitted to work out their notice period at their original rate of pay rather than at the reduced rate of pay.

In summary, while it is possible for employers in Canada to make certain unilateral and fundamental changes to an employee’s terms of employment, a careful approach needs to be determined with the assistance of legal counsel so as to protect from a constructive dismissal claim altogether or to prevent a damages payout.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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