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Constructive Dismissal

Can you reduce an employee’s compensation, change their commission structure or their working hours?

Can you change an employee’s title, duties or reporting relationship, or move them to a different location? What if you maintain their compensation?

Sometimes, you need to reduce labour costs or make changes to your organization. You have rights as an employer, but they are not unlimited. Many employers forget that employment relationships are legal relationships. Just as you wouldn’t announce to your landlord that you are reducing your rent payments, in most cases you can’t unilaterally reduce an employee’s salary.

Unfortunately, many employers make the mistake of assuming they can simply reduce an employee’s hours or pay, or transfer them to a different role or location. That is when they get into trouble, because in most cases, they don’t have the right to do so. Contrary to popular belief, even if you leave an employee’s compensation untouched, other changes can constitute a constructive dismissal.

Similarly, we have seen employers try to avoid their severance obligations by changing an employee’s working conditions, essentially trying to force the employee to quit. This is a very poor strategy that is likely to expose you to more costs, not less.

What is “constructive dismissal”?

Constructive dismissal involves a unilateral and substantial change to a fundamental term of the employment contract or relationship.

Of course, not every change will constitute a constructive dismissal. First of all, it must be a unilateral change. This means that the decision is made by an employer without negotiating with the employee whom it affects. However, not all unilateral changes will amount to constructive dismissal.

The change must also be substantial. There are no absolute rules with respect to what is “substantial” as there are so many different contexts in which this must be considered.

When it comes to compensation, a nominal change may not be a constructive dismissal, but if the change is greater than 15 per cent, it likely is. Of course, every case will have to be assessed based on its own particular circumstances.

Employers often make the mistake of assuming that compensation is the only critical factor, and as long as they do not change the compensation package, everything else is fair game. That is entirely untrue. You cannot demote someone to a lower position and dramatically change their job, while defending the action by proclaiming that you maintained their compensation package.

What constitutes a fundamental term will vary depending upon the particular case. For example, relocating an employee to a different office may be a substantial change amounting to constructive dismissal. Similarly, while moving someone from one desk to another may seem innocuous, if it creates a perception they have moved “down the corporate ladder” it can be a constructive dismissal.

Do you have the right to make the change?

A change will only constitute a constructive dismissal if the employer did not have the right to impose it. This can be an explicit right within the employment contract or an implied right based on the circumstances. It is only where that right does not exist that the individual may have a legitimate right to object.

So how can you implement changes? The best way is to give yourself the right to do so in the employment contract. If it’s too late for that, then you can always negotiate and agree upon the exchange. Lastly, you can give notice of the change, but that can involve waiting for a lengthy period of time. Of course, if you implement a change and the employee does not object, they will eventually be deemed to have accepted it and precluded from taking action in the future.

Sometimes it is necessary to take steps to reduce costs. However, even when the impact is distributed across the board, and management takes a similar or even bigger hit, that does not change the fact that a substantial change to a unilateral term of employment is a constructive dismissal. Cutting everyone’s compensation by the same amount may seem like a way to save jobs and avoid dismissals, but it could mean that everyone has a constructive dismissal claim.

How We Can Help

Before you do anything that could expose you to risk, make sure you understand your rights and the options available to you. You may have the right to do what you propose to, but you may not. We can help you do it properly. Spending time on a constructive dismissal claim is not a constructive use of your time.

We also help you implement valid and enforceable contracts with your employees which allow you to have more flexibility in changing the terms of an employee’s agreement. Anticipating future needs in your contracts is the best way to avoid future constructive dismissal claims and minimize your liability.

We want to be your Trusted Advisor, your Chief HR Law Officer, your business partner. Let us be part of your team, so that we can look after your employment law issues, and you can focus on your business.

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fired for cause book

You’re Fired! Just Cause for Dismissal in Canada

This well-written and comprehensive textbook, authored by Stuart Rudner, provides legal advice to employers, employees, and their legal counsel, as to whether summary dismissal is appropriate in a particular circumstance.

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