Pay Cut is Constructive Dismissal

Discipline and Dismissals
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I hate to say, “I told you so”, but…we have been saying for over a year that employers risk a finding of constructive dismissal when they lay off employees or even impose cuts in hours and/or compensation, even during a pandemic.

What is a Constructive Dismissal?

As we explain in more detail on the Constructive Dismissal page of our website,

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

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.

While much of the discussion in the early stages of the pandemic focused on temporary layoffs, we saw many employers try to avoid layoffs by imposing wage and/or hours reductions. That is less risky, but still far from without risk.

Get the employee(s) to agree

During the pandemic, we have worked with our clients to minimize the risk of a constructive dismissal claim. First, as we have been saying for years, employers can have a temporary layoff provision in their contracts which gives them the right to unilaterally impose layoffs. Employment contracts can also include wording which allows for changes to work hours and compensation. Many of our clients were unexpectedly thrilled to learn that they had these rights and could simply proceed with their plans.

For employers that do not have such clauses in their contracts, we have worked with them to obtain the consent of the employees. This approach has been successful in the vast majority of cases, and we have helped these clients to avoid claims of constructive dismissal.

16-20% Cut is a Constructive Dismissal

So, what can happen if an employer simply imposes a substantial cut in pay?

The recent decision from the Court of Queen’s Bench of Alberta in Kosteckyj v Paramount Resources Ltd confirms that they are likely to be found liable for constructive dismissal.

On March 27, 2020, the company announced cost-cutting efforts to reduce the financial impact of the pandemic. The plaintiff’s salary was cut by 10%, RRSP contributions (6% of salary) were suspended, and the state of her bonus was put in limbo.

Less than a month later, the plaintiff was dismissed without cause in a further cost-cutting effort. She sued for wrongful dismissal and alleged that she was constructively dismissed when her wages were cut.

Notably, the defendant asserted that by failing to object to the pay cut, the plaintiff had effectively accepted it. According to the court:

Ms. Kosteckyj’s opportunity to make this election was limited to the period between the notice of the Cost Reduction Program and her termination. While the 25-day period in this case is more than “a couple of weeks”, as noted in Farquhar, in the turbulent economic conditions that both parties accept exist, I do not find that Ms. Kosteckyj had an obligation to decide on whether the Cost Reduction Program constituted a repudiation of her employment contract within that 25-day period before her termination.

With respect to the extent of the pay cut, the court found that the total impact was a reduction of 20%:

Using her pre-April 1, 2020 salary of $154,800, the 16% reduction, together with the loss of a cash bonus of $1,000, would result in a 16.65% compensation reduction. The 16% reduction, together with the loss of a cash bonus of $6,267, would result in a total reduction of 20%. The effect of the Cost Reduction Program significantly affected Ms. Kosteckyj’s compensation in the range of 16.65% to 20%, without considering any value for the RSUs. I find that the implementation of the Cost Reduction Program resulted in the constructive dismissal of Ms. Kosteckyj.

This finding was reached despite the impact of the pandemic on the employer’s financial circumstances:

Both parties accept that the Cost Reduction Program was a legitimate business reaction to turbulent economic times. However, it significantly affected Ms. Kosteckyj by imposing a salary reduction of 10%, a suspension of the RRSP contribution valued at 6% of her salary and the “delay/cancellation of the 2019 Bonus Program”. I find that the compensation reduction imposed by the Cost Reduction Program was detrimental to Ms. Kosteckyj and that a breach of her employment contract occurred.

Takeaways about Pay Cuts and Constructive Dismissal

As we have said many times, even during a pandemic, employers do not have carte blanche to change the employment relationship. That is true whether we are discussing a layoff or a change in hours or compensation.

The best practice is for an employer to give itself the right to impose layoffs or changes in the contract of employment. That is part of what we do in our HR Checkup. Employers should adopt a proactive, strategic approach to HR rather than being reactive and risking claims by taking actions that they may not have the right to take.

If an employer does not have a contractual right to impose a significant change, the most prudent approach is to obtain the consent of the employee(s). We can work with you to do so.

Lastly, for employees, do not assume that your employer has the right to cut your pay, reduce your hours, or put you on a temporary layoff. Despite what you may see or hear, they probably don’t.

Contact us so we can make sure you understand your rights.

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