Part 1: Changes To Terms Of Employment In An Economic Downturn

During the current recession, employers may be tempted to make substantial changes or dismiss a portion of their workforce to reduce operating costs. Even with preparation, both of these options expose employers to damages for constructive dismissal.

Constructive dismissal occurs when there is a unilateral change that substantially alters an essential term of employment (Farber v. Royal Trust Co. [1997] 1 S.C.R. 846 ("Farber")). The test for constructive dismissal was recently reaffirmed in Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10 ("Potter"). According to Potter, the test has two branches. First, the court must identify an express or implied contractual term that has been breached and then determine whether that breach substantially altered an essential term of the contract. Under the second branch, the court must consider whether the conduct of the employer, when viewed in 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.

An employer's focus during an economic downturn will most likely be on the first branch of the Potter analysis. The employer should assess whether the change being considered substantially breaches an essential term of the contractual relationship between the employer and the employee. When made by the court, this determination is fact specific and based on what a reasonable person in similar circumstances would consider substantial. Even a minor alteration may be considered substantial depending on the impact to the employee. It is especially problematic when the minor change touches upon the duties, responsibilities, and prestige of the employee (Morgan v. Vitran Express Canada Inc., 2015 ONCA 293 ("Morgan")). For instance, if an employer lowers wages by less than 10%, even though wages are arguably the most essential term of the contract, that alone typically will not constitute constructive dismissal. However, if that employer, in the interest of financial reorganization, assigns a manager a new role in which he or she is working alongside employees that he or she once supervised or managed, it is probable that the employee has been constructively dismissed, even if managerial duties were never expressly determined.

Once notice of a substantial change is provided, the employer must be prepared for one of three responses. The employee may:

accept the change, either expressly or impliedly...