When Can a Person Resign and Claim Constructive Dismissal?

A Significant Change In the Employment Arrangement Including Change In Rate of Pay, Work Hours, Place of Work, Among Other Things, May Be a Form of Constructive Dismissal.

Understanding What Constitutes As a Constructive Dismissal of An Employee

Lawsuit Document When an employer changes the pay, benefits, duties, or position, of an employee unilaterally, meaning without obtaining genuine consent from the employee, and without some other lawful right to do so, which would rarely exist, the employee may be well positioned to sue for constructive dismissal.

The Law

As decided by the Supreme Court of Canada in the precedent case of Farber v. Royal Trust Company, [1997] 1 S.C.R. 846, the legal test as to whether the modification has crossed the line from acceptable to unacceptable involves considering from an objective viewpoint of whether a reasonable person in the same circumstances of the employee would find the modifications unreasonable and/or unfair.  Specifically, the Supreme Court stated:

...  each constructive dismissal case must be decided on its own facts, since the specific features of each employment contract and each situation must be taken into account to determine whether the essential terms of the contract have been substantially changed.

Subsequently, the Ontario Court of Appeal further iterated and added additional clarity to the Farber precedent within the case of Reynolds v. Innopac Inc., 1998 CanLII 3558 where it was stated:

The latest decision of the Supreme Court of Canada on the question of constructive dismissal, Farber v. Royal Trust Co., [1997] 1 S.C.R. 846, 145 D.L.R. (4th) 1, was released the same day as the hearing of this appeal.  It does not, in my  view, change the law of constructive dismissal, but it does articulate clearly the question which the trial judge must answer on the facts of the case.  At pp. 858-59 of his reasons, concurred in by all members of the court sitting on the appeal, Gonthier J. sets out the concept of constructive dismissal as it is understood in civil law and defines common law constructive dismissal in the same manner.  He states:

Where an employer decides unilaterally to make substantial employment and the employee does not agree to the changes and leaves his or her job, the employee has not resigned, but has been dismissed.  Since the employer has not formally dismissed the employee, this is referred to as "constructive dismissal".  By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and is therefore terminating the contract.

.....

To reach the conclusion that an employee has been  constructively dismissed, the court must therefore determine whether the unilateral changes imposed by the employer  substantially altered the essential terms of the employee's contract of employment.  For this purpose, the judge must ask whether, at the time the offer was made, a reasonable person  in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed.  The fact that the employee may have been prepared to accept some of the changes is not  conclusive, because there might be other reasons for the employee's willingness to accept less than what he or she was entitled to have.

Moreover, for the employment contract to be resiliated, it is not necessary for the employer to have intended to force the employee to leave his or her employment or to have been acting in bad faith when making substantial changes to the contract's essential terms.

In the years since Farber and Renolds, further cases have helped to clarify the legal tests used to determine whether conduct by an employer constitutes as a constructive dismissal.  Of particular note is the Supreme Court case of Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 (CanLII), [2015] 1 SCR 500 which provided a very detailed explanation as to how courts should assess constructive dismissal allegations.  Specifically it was said:

[30]  When an employer’s conduct evinces an intention no longer to be bound by the employment contract, the employee has the choice of either accepting that conduct or changes made by the employer, or treating the conduct or changes as a repudiation of the contract by the employer and suing for wrongful dismissal. This was clearly stated in Farber, at para. 33, the leading case on the law of constructive dismissal in Canada. See also In re Rubel Bronze and Metal Co. and Vos, [1918] 1 K.B. 315, at p. 322. Since the employee has not been formally dismissed, the employer’s act is referred to as “constructive dismissal”. The word “constructive” indicates that the dismissal is a legal construct: the employer’s act is treated as a dismissal because of the way it is characterized by the law (J. A. Yogis and C. Cotter, Barron’s Canadian Law Dictionary (6th ed. 2009), at p. 61; B. A. Garner, ed., Black’s Law Dictionary (10th ed. 2014), at p. 380).

[31]  The burden rests on the employee to establish that he or she has been constructively dismissed. If the employee is successful, he or she is then entitled to damages in lieu of reasonable notice of termination. In Farber, the Court surveyed both the common law and the civil law jurisprudence in this regard. The solutions adopted and principles applied in the two legal systems are very similar. In both, the purpose of the inquiry is to determine whether the employer’s act evinced an intention no longer to be bound by the contract.

[32]  Given that employment contracts are dynamic in comparison with commercial contracts, courts have properly taken a flexible approach in determining whether the employer’s conduct evinced an intention no longer to be bound by the contract. There are two branches of the test that have emerged. Most often, the court must first identify an express or implied contract term that has been breached, and then determine whether that breach was sufficiently serious to constitute constructive dismissal: J. R. Sproat, Wrongful Dismissal Handbook (6th ed. 2012), at p. 5-5; P. Barnacle, Employment Law in Canada (4th ed. (loose-leaf)), at §§13.36 and 13.70. Typically, the breach in question involves changes to the employee’s compensation, work assignments or place of work that are both unilateral and substantial: see, e.g., G. England, Individual Employment Law (2nd ed. 2008), at pp. 348-56. In the words of McCardie J. in Rubel Bronze, at p. 323, “The question is ever one of degree.”

[33]  However, an employer’s conduct will also constitute constructive dismissal if it more generally shows that the employer intended not to be bound by the contract. In applying Farber, courts have held that an employee can be found to have been constructively dismissed without identifying a specific term that was breached if the employer’s treatment of the employee made continued employment intolerable: see, e.g., Shah v. Xerox Canada Ltd. (2000), 2000 CanLII 2317 (ON CA), 131 O.A.C. 44; Whiting v. Winnipeg River Brokenhead Community Futures Development Corp. (1998), 1998 CanLII 19422 (MB CA), 159 D.L.R. (4th) 18 (Man. C.A.). This approach is necessarily retrospective, as it requires consideration of the cumulative effect of past acts by the employer and the determination of whether those acts evinced an intention no longer to be bound by the contract.

[34]  The first branch of the test for constructive dismissal, the one that requires a review of specific terms of the contract, has two steps: first, the employer’s unilateral change must be found to constitute a breach of the employment contract and, second, if it does constitute such a breach, it must be found to substantially alter an essential term of the contract (see Sproat, at p. 5-5). Often, the first step of the test will require little analysis, as the breach will be obvious. Where the breach is less obvious, however, as is often the case with suspensions, a more careful analysis may be required.

[35]  In Farber, Gonthier J. identified such a change as a “fundamental breach”. The term “fundamental breach” has taken on a specific meaning in the context of exclusionary or exculpatory clauses: see, e.g., Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 104-23. To avoid confusion, I will therefore use the term “substantial breach” to refer to breaches of this nature.  The standard nevertheless remains unchanged — a finding of constructive dismissal requires that the employer’s acts and conduct “evince an intention no longer to be bound by the contract”: Rubel Bronze, at p. 322, citing General Billposting Co. v. Atkinson, [1909] A.C. 118 (H.L.), at p. 122, per Lord Collins, quoting Freeth v. Burr (1874), L.R. 9 C.P. 208, at p. 213.

[36]  The two-step approach to the first branch of the test for constructive dismissal is not a departure from the approach adopted in Farber. Rather, the situation in Farber was one in which the identification of a breach required only a cursory analysis. The emphasis in Farber was on the second step of this branch, as the evidentiary foundation for the perceived magnitude of the breach was the key issue in that case. However, the identification of a unilateral act that amounted to a breach of the contract was implicit in the Court’s reasoning. In many cases, this will be sufficient. The case at bar, however, is one in which the claim can be properly resolved only after both steps of the analysis have been completed.

[37]  At the first step of the analysis, the court must determine objectively whether a breach has occurred. To do so, it must ascertain whether the employer has unilaterally changed the contract. If an express or an implied term gives the employer the authority to make the change, or if the employee consents to or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach. If so, it does not amount to constructive dismissal. Moreover, to qualify as a breach, the change must be detrimental to the employee.

[38]  This first step of the analysis involves a distinct inquiry from the one that must be carried out to determine whether the breach is substantial, although the two have often been conflated by courts in the constructive dismissal context. Gonthier J. conducted this inquiry in Farber, in which an employee had been offered a new position that was found to constitute a demotion. He stated that “the issue of whether there has been a demotion must be determined objectively by comparing the positions in question and their attributes”: Farber, at para. 46.

[39]  Once it has been objectively established that a breach has occurred, the court must turn to the second step of the analysis and ask whether, “at the time the [breach occurred], a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed” (Farber, at para. 26). A breach that is minor in that it could not be perceived as having substantially changed an essential term of the contract does not amount to constructive dismissal.

[40]  The kinds of changes that meet these criteria will depend on the facts of the case being considered, so “one cannot generalize”: Sproat, at p. 5-6.5. In each case, determining whether an employee has been constructively dismissed is a “highly fact-driven exercise” in which the court must determine whether the changes are reasonable and whether they are within the scope of the employee’s job description or employment contract: R. S. Echlin and J. M. Fantini, Quitting for Good Reason: The Law of Constructive Dismissal in Canada (2001), at pp. 4-5. Although the test for constructive dismissal does not vary depending on the nature of the alleged breach, how it is applied will nevertheless reflect the distinct factual circumstances of each claim.

[41]  The uniqueness of the application of this first branch of the test is evident in cases involving administrative suspensions. In all cases, the primary burden will be on the employee to establish constructive dismissal, but where an administrative suspension is at issue, the burden will necessarily shift to the employer, which must then show that the suspension is justified. If the employer cannot do so, a breach will have been established, and the burden will shift back to the employee at the second step of the analysis.

[42]  The second branch of the test for constructive dismissal necessarily requires a different approach. In cases in which this branch of the test applies, constructive dismissal consists of conduct that, when viewed in the light of all the circumstances, would lead a reasonable person to conclude that the employer no longer intended to be bound by the terms of the contract. The employee is not required to point to an actual specific substantial change in compensation, work assignments, or so on, that on its own constitutes a substantial breach. The focus is on whether a course of conduct pursued by the employer “evince[s] an intention no longer to be bound by the contract”: Rubel Bronze, at p. 322. A course of conduct that does evince such an intention amounts cumulatively to an actual breach. Gonthier J. said the following in this regard in Farber:

In cases of constructive dismissal, the courts in the common law provinces have applied the general principle that where one party to a contract demonstrates an intention no longer to be bound by it, that party is committing a fundamental breach of the contract that results in its termination. [para. 33]

[43]  Thus, constructive dismissal can take two forms: that of a single unilateral act that breaches an essential term of the contract, or that of a series of acts that, taken together, show that the employer no longer intended to be bound by the contract. The distinction between these two forms of constructive dismissal was clearly expressed by Lord Denning M.R. in a leading English case, Western Excavating (ECC) Ltd. v. Sharp, [1978] 1 All E.R. 713 (C.A.). First of all, an employer’s conduct may amount to constructive dismissal if it “shows that [he] no longer intends to be bound by one or more of the essential terms of the contract”: p. 717. But the employer’s conduct may also amount to constructive dismissal if it constitutes “a significant breach going to the root of the contract of employment”: ibid. In either case, the employer’s perceived intention no longer to be bound by the contract is taken to give rise to a breach.

Similar to liability arising in wrongful dismissal, in constructive dismissal cases, the employer owes compensation to the employee whether in accordance to the Employment Standards Act, 2000, S.O. 2000, Chapter 41 or the common law upon consideration of the Bardal factors.

The modifications to an employment arrangement that may be substantial enough to give rise to constructive dismissal circumstances are extension; however, a few key and commonplace concerns include:

Lay Off, requires previous negotiated contract provision

Many employers presume that a general right or statutory right to lay off an employee exists.  This is inaccurate as a lay off, unless expressly permitted to do so within a valid and enforceable employment agreement, is a form of constructive dismissal.  Cases confirming that a lay off, generally, constitutes as a constructive dismissal include Martellacci v. CFC/INX Ltd., 1997 CanLII 12327McLean v. The Raywal Limited Partnership, 2011 ONSC 7330; and Ellis v. Artsmarketing Services Inc., 2017 CanLII 51563, wherein such cases it was said:

29  It is trite law that if an employer changes a fundamental term of employment, this may constitute constructive dismissal. It is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary.

30  In this case, there was no agreement that the employer was entitled to lay off the employee for any period of time. In the absence of such an agreement, the employer cannot simply place an employee’s employment status on hold without pay and without substantial benefits and expect that this will not constitute constructive dismissal. If the demotion of an employee or a reduction in pay and responsibilities of an employee constitute constructive dismissal, then surely indefinite suspension with no guarantee of recall, no salary and virtually no benefits must also qualify for the same treatment at law.

31  This issue was dealt with by the Divisional Court in Style v. Carlingview Airport Inn. The Divisional Court found that a lay-off amounted to wrongful dismissal and held at page 166 to 167:

In the case at bar, the plaintiff had a contract of indefinite hiring. There was no express term contemplating layoff as in a collective agreement. There had been no lay-offs before, nor was any warning of possible layoff given. Nor were any benefits paid during the layoff. The hours of employment were adapted on an ongoing basis to the work available based on the occupancy of the hotel, but there had never been a layoff. Also, the plaintiff was often called upon when there was extra work to do, indicating that the employer was satisfied with her work.

In my view there was no express or implied term of the contract of employment that the employee could be temporarily laid off with out pay.

32  In the case before me, there was no agreement with respect to lay-offs and there were no warnings. The lay-off was imposed unilaterally. With respect to the April lay-off, however, there was at least a triable issue as to whether the employee acquiesced and accepted that particular lay-off as part of her employment agreement. I do not say that this is necessarily the case, but merely that on a summary judgment motion, I am not prepared to say that there is no triable issue on this point. Also, although the plaintiff’s material suggests that the employer was not acting bona fide when issuing the lay-off and that the employer, in fact, had no real intention of returning her to her position, again, in my view, the defendant has raised a triable issue on this point. I am not prepared to conclude, applying the test for a summary judgment motion, that the lay-off on April 12th was termination of employment.

33  However, with respect to the July lay-off, there can be no doubt. The employee by then had retained counsel. Clear letters were sent requesting clarification and assurances. Those were not provided. The July lay-off most clearly was not accepted by the employee. On the contrary, the employee, as a consequence, sued for wrongful dismissal.

34  When an employer without prior agreement lays off an employee, the employee may elect to wait and see. The employee may acquiesce in the lay-off to see if later he will be able to return to his previous job. However, an employee is not obligated to do that. An employee may treat the lay-off as a wrongful dismissal. Ms. Martellacci clearly treated the July lay-off as a wrongful dismissal of her employment.

35  I agree with counsel for the plaintiff. There had been a fundamental change in the employment relationship. Ms. Martellacci was not working and she was not being paid. This constitutes wrongful dismissal.

[19]  The parties agree that a layoff will be lawful and of effect where it is based on an employment contract.  In the absence of a contractual basis for layoff, the device of layoff does not exist at common law and any purported layoff will be in fact, a dismissal.

[50]  I wish to briefly address in passing the issue of layoff which was raised in the plaintiff’s submissions as there seems to be a vacuum between the termination date of April 1, 2016 and the time that passed since the alleged offer was made to the plaintiff for a new job. This is a time when she was not being paid and had no work.

[51]  Jurisprudence has established that any layoff must be based on the employment contract; otherwise it is a dismissal, as layoff does not exist at common law. This was expressed in paragraphs 19 and 20 of the case of McLean v. The Raywal Limited Partnership, 2011 ONSC 7330 (CanLII) (OSCJ), submitted by the plaintiff, as follows:

[19]  The parties agree that a layoff will be lawful and of effect where it is based on an employment contract.  In the absence of a contractual basis for layoff, the device of layoff does not exist at common law and any purported layoff will be in fact, a dismissal.

[20]  There was clearly no contractual basis for layoff in Natalie’s contract of employment which began on July 15, 1998 as there was no reference to layoff in the signed and returned letter of employment, nor were there other references or acknowledgements to indicate that the layoff provisions of the employee handbook applied to Natalie.

[52]  In reviewing the employment contract relied on by the defendant in this case, I am unable to find any express term which allows a lay off or any suspension from employment.

[53]  In the absence of an express contractual basis for a layoff any interruption in employment is therefore a dismissal.

[54]  The plaintiff submitted the following additional cases in support of her position regarding this question, which I have reviewed: Elsegood v. Cambridge Spring Service (2001) Ltd., 2001 ONCA 831 (CanLII) regarding layoff; Carscallen v. Fri Corporation, 2006 CanLII 31723 (ONCA) regarding unpaid suspension.

Harassing By Employer, general damage and punitive damage

Whereas an employer that engages in intimidating, harassing, insulting, or embarrassing, behaviour gives cause to an employee to resign from employment and bring a claim for constructive dismissal, the employee may also be entitled to general damages for stress injury as well as punitive damages if necessary to denounce and deter further similar behaviour; Boucher v. Wal-Mart Canada Corp., 2014 ONCA 419.

Summary Comment

When an employer significantly changes the nature of the employment relationship, a constructive dismissal may be deemed to occur.  This includes changes to pay, place of work, hours of work, duties, among other things.  Additionally, unless the employee agreed within an employment contract that the employer would hold a right of lay-off, an employer that lays off an employee may be deemed as constructively dismissing the employee.

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