Constructive Dismissal

The Leading Cases

The Supreme Court of Canada has released three important decisions on the issue of constructive dismissal. Two are reviewed below. The third decision of Evans v Teamsters is not a direct constructive dismissal decision but it is impactful on this issue, as reviewed here.

Farber v Royal Trust March 1997

In this case, the employee was presented with a “significant, even a serious demotion”. The company had asserted that the new position offered, one which comprised of only commission compensation, would have resulted in a higher total income. Gonthier, J.A. concluded that the evidence of the subsequent actual earnings attributable to the demoted position should not have been admitted. The test required an assessment made at the time of the breach as to whether this was a substantial one. Later evidence, which was not available, nor reasonably anticipated, should not be the guide.

Farber had been employed as a regional manager for Western Quebec and was responsible for 400 real estate agents and 21 regional offices. His 1983 income, which included commissions, benefits and a base salary of $48,000, totaled $150,000. In June of 1984, the company had eliminated the regional manager positions. Farber was offered a manager position, one which he had held 8 years prior. There was no guaranteed salary. The assigned branch was one of the least profitable in the province. He was also offered a $40,000 reorientation allowance and a commission rate which was higher than the typical one, for the remainder of the period from June 1984 and 1985. He was also promised payment of the commissions earned in his last position to date. He sought to be given a guaranteed base salary for the next three years or a more profitable branch.

Apart from setting out the fundamental principles of constructive dismissal, the case is significant as it reversed the trial and appellate decisions. Both had allowed in evidence the actual commissions that Farber would have earned at the newly offered branch. The Supreme Court determined that this evidence was not to be admitted, as the issue of the breach was to be determined from the known facts as of the date of the offer.

The Court reviewed common law jurisprudence and that of Quebec and made these observations: 1

  1. A demotion to a position of less prestige and status is a substantial change which allows for the finding of constructive dismissal;

  2. A unilateral change to the method of calculating an employee’s remuneration may come to the same conclusion;

  3. A significant reduction in income may come to the same end.

These cases all involve the same theme, to determine if there has been a unilateral and fundamental change to the terms of employment, as “such action amounts to a repudiation of the contract”.

On these facts, the Supreme Court found that there had been such a fundamental breach, given:

  1. A serious demotion;

  2. A loss of status and prestige;

  3. In the offered position, there was no guaranteed salary component; the conditions of the new branch were “to say the least inauspicious”; the reorientation bonus could not replace a guaranteed salary.

The offer must be assessed based on a reasonable person’s view at the time it was offered. The issue must be weighed by the then current knowledge and that which was reasonably foreseeable. For this reason, the subsequent evidence of the actual results of the branch and the consequential commission income Farber would have received, had he accepted the position, was not relevant.

Of some note is that the Ontario Court of Appeal decision in Mifsud was before the court and no reference was made to this issue of the obligation to mitigate by accepting the demoted position. Presumably this had not been argued at trial or on first appeal.

Potter v New Brunswick March 2015

This decision remains the primary reference point for constructive dismissal. It did involve a unique issue with respect to the question of the implied right to suspend. This was an administrative suspension, but not one intended to further an investigative process. For that reason, part of the analysis was a review of when a court may imply into the relationship the right to suspend to determine what were the terms of the employment relationship. This first step was necessary to determine the terms of employment, express or implied.

Potter had been employed as Executive Director of the New Brunswick Legal Aid Services for a seven year term. The relationship had shown signs of wear. The parties were in negotiations to buy out Potter’s contract. In the course of this process, Potter began a sick leave. Unknown to Potter, while he was on leave, the Commission had recommended to its overseer, the Department of Justice, that Potter be terminated for cause. This resulted in a directive to Potter, through his legal counsel, that he was not to return to work until further direction. Prior to the completion of the sick leave, the Commission suspended Potter with pay and assigned his duties to someone else. This resulted in the assertion of a constructive dismissal.

Potter was unsuccessful at trial and on appeal. The Supreme Court ultimately found in his favour. The court distinguished two forms of such a claim. The first is an assertion that a contractual term has been unfairly revised and the second is based on an abusive work environment.

The majority decision set out the fundamentals in such a claim.

  1. The employer’s conduct must reveal an intent to no longer be bound by the employment contract;
  2. The employee is then put to their election. They may accept the change or assert that such conduct is a repudiation of the working relationship.
  3. The onus of proof of such a position lies upon the employee.
  4. Courts have used a “flexible approach” to assess whether the questioned conduct shows the required intent to no longer be bound by the contract in place.
  5. There have been two tests used to determine such a claim.

Test A Revision to an Existing Contractual Term

  1. This test, in turn, has two distinct components. Step one of this test is look to the terms of the contract. This will require a determination of whether there exists an express term or an implied term that has been violated. The change must be detrimental to the employee.
  2. Step two is then to determine the degree of gravity of the breach. Is this sufficiently serious to constitute a constructive dismissal? The question then becomes one of degree. This is an objective test. The question is whether a reasonable person in the same context would have felt that the essential terms of the agreement were substantially changed. A minor breach would not qualify. This is very much a fact driven analysis.

Test B Abusive Work Environment

  1. This analysis looks to the overall treatment of the employee, such as abusive conduct which has made continued employment intolerable. This review will look to the continuum of the employer’s conduct.

Potter involved the test summarized above as Test A.

The Court then looked to the terms of employment to determine whether there was direct or implied right of administrative suspension. The plaintiff’s employment was governed by a public statute, which did not allow the employer the right of suspension. 2 This particular aspect of the decision would be peculiar to the facts of this case dealing with whether the terms included the implied right to suspend for administrative and not disciplinary purposes.

The Court also noted that it could not imply such a right of suspension. The statute may have been distinctive in this instance, as the Court noted the details provided in the statute for Potter’s obligations. It concluded that the employer had “an obligation to provide Potter with work”.

More importantly, for a more general proposition on the implied power to suspend, the Court noted that even if there was such an implied right, the use of it must be predicated upon a “basic requirement of business justification”. In this instance, the Court added that, for such a hypothetical power of suspension to be considered, it requires a “basic level of communication” with the employee. Here Potter was given no reason for this action. The employer must act in a manner which is “honest, reasonable, candid and forthright”. Factors weighing against such conduct in this instance, included the recommendation to the Minister for Potter’s termination, the fact that Potter had been replaced and that the period of suspension was indefinite. Here, the Court concluded that there was “no doubt that the suspension was unauthorized”.

As to the second stage of Test A, there was no hesitation taken by the Court in finding that the unauthorized unilateral suspension was a substantial change to the employment contract.

Administrative Suspension

The situation of an administrative suspension offers a further complexity. The employee has the onus to show that the action taken is contrary to the terms of the contract. Should this be accomplished, the employer then must show that the suspension is reasonably justified. The gradation of the breach, in this particular case, requires consideration of whether a reasonable person would have perceived that the employer was acting in good faith to protect a legitimate business interest and further that such action had a minimal impact upon him in “terms of the duration of the suspension”.

The Court also noted that consideration must be given to the employee’s vulnerability when apprised of the change in employment terms. The choice is a difficult one, namely, to accept the change as proposed, or to assert that the contract has been breached and to sue. This context, the Court noted, is one in which there is a power imbalance and where information made available to the employee is limited. For this reason, it would be unfair to rely upon information unknown to the employee or could not be reasonably anticipated.

The decision in Potter did not revise the fundamental analysis from Farber. 3 The Mifsud decision was not referenced in the Supreme Court reasons, nor at trial, nor on first appeal.

On the application of either test in Potter, the issue is whether the conduct of the employer has shown its “perceived intention no longer to be bound by the contract. 4

The fundamental principles are set out in these cases, and also Evans. These cases were noted in a 2019 decision of the Nova Scotia Court of Appeal to be all that one needs to know: 5

A safari through texts, articles and appellate authorities is unnecessary.  We need only consider three Supreme Court of Canada cases: Farber v. Royal Trust Co., 1997 CanLII 387 (SCC), [1997] 1 S.C.R. 846; Evans v. Teamster Local Union No. 31, supra; and, Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10.  Each of these cases is important.