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Managing The Risk of Constructive Dismissal

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Managing The Risk of Constructive Dismissal

In this period of economic decline, many employers are faced with the need to restructure their workforce.  Unfortunately, imposing unilateral changes upon employees raises the risk of constructive dismissal claims.

Cowed by lawyers’ warnings, many employers will shy away from the structural changes needed for business survival.  My own view is that business changes can be effectively managed to limit the risk of legal liability.

When an employer unilaterally imposes substantive changes to an employment contract, the employee sometimes has the right to treat those changes as a termination.  Such a “constructive” dismissal is every bit as real as if the employee were actually informed of the termination, and gives rise to the same right to claim damages in lieu of notice.

Not every imposed change, however, will amount to a constructive dismissal.  The change must be one which is substantial and which goes to the heart of the employment relationship such as a transfer, demotion, substantial reduction in wages, or unpaid layoff.

These are precisely the categories of changes which employers will need to impose at a time like this.  With shrinking revenues, fewer employees to perform the necessary range of tasks, and the closing of branch offices the remaining employees will find themselves in a different situation.

If the changes imposed amount, at law, to a constructive dismissal then the employee is entitled to walk away from the employment and claim damages.  In practice, however, numerous factors minimize the likelihood of this occurring.

First, the onus is on the employee to adopt the stance that his or her employment has been constructively terminated.  This is a high-stakes decision which can be very difficult to make because there is no list of the specific criteria by which a constructive dismissal may be identified or measured.

The only way for the employee to find out if a constructive dismissal has occurred is to resign from the employment and commence an action for damages.  The outcome of this roll of the dice will be determined when a judge rules on the situation.

This takes time and money and, in the meantime, the employee will be deprived of a stream of income.  This may be the most powerful influence limiting the likelihood of constructive dismissal claims – people just don’t walk away, lightly, from their source of income.

Second, there is the legal premise that the innocent victim of a contractual breach must take steps to mitigate her losses.  So, individuals claiming damages for wrongful dismissal must make reasonable efforts to find replacement employment.

If they do not do so, their failure to mitigate their losses will negatively impact their entitlement to pay in lieu of notice.  Sometimes, the failure to act reasonably in mitigating can entirely cancel out the legal remedy.

The duty to mitigate sometimes means accepting another job with the former employer.  An individual may even be required to relocate in order to retain employment with the same employer.

The employee’s duty to mitigate allows the court to look at the reasonableness of the employee’s response to the employer’s imposition of changes.  A court could decide that an employee was constructively dismissed but that walking away from the altered position amounted to a failure to mitigate.

Third, the employer always has the ability to limit its liability using its ultimate get-out-of-jail-free card, reasonable working notice.  This is useful when the employer has the luxury of time to implement the planned changes.

The rules about providing working notice of a fundamental change to the terms of employment are, however, not exactly stable.  Courts seem to sway back and forth on whether reasonable working notice of a fundamental change will eliminate the risk of liability for constructive dismissal.

The present wisdom, from the Ontario Court of Appeal, seems to be that the employer should provide the employee with reasonable working notice of termination and an offer of re-employment (under the new terms) effective upon the expiry of the working notice period.

Rather than shying away from necessary business changes, I suggest to employers that they approach the changes, and the affected employees, with a view towards managing the risk of constructive dismissal claims.

The employer should identify the necessary changes and determine specifically which employees would be affected (and in what way).  The employer can approach the employees to obtain their reaction to the necessary changes – there’s no legal harm in asking.

If there is significant “push back” from an employee, the employer can obtain legal advice about whether the planned changes are substantial enough to create a risk of a constructive dismissal.  The lawyer can further advise on the degree to which the employee will be risking a finding that he or she has failed to mitigate by rejecting the revised terms of employment.

If all else fails, the employer can play the reasonable working notice card to minimize its liability.  In this way, the risk of constructive dismissal claims can be managed effectively, if not totally eliminated.
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