COVID-19 and Constructive Dismissal

This blog post discusses employment law as it applies to provincially regulated non-unionized workplaces in British Columbia. Information in this blog post may not be accurate with respect to federally regulated workplaces, unionized work places, and workplaces located outside of British Columbia.

Due to COVID-19 and the ensuing economic downturn, employers are looking for ways to reduce costs so as to stay afloat in the face of reduced revenues. Temporary reductions in employee compensation or layoffs may seem like obvious choices; however, these measures might produce more problems than they solve. Unless certain requirements have been satisfied, unilateral reductions in employee compensation or layoffs likely constitute a ‘constructive dismissal’, thereby entitling the affected employees to damages in a manner akin to a without cause dismissal. For this reason, employers should be aware of the concept of the constructive dismissal and how to avoid it. Otherwise, a measure intended to reduce expenses may end up causing more expenses than it saves.

Constructive Dismissal

So just what is a constructive dismissal? In short, it is a dismissal of an employee that occurs without formally terminating the employment relationship (for example, providing an employee with termination notice would be a formal termination). Where the employer demonstrates an intention to no longer be bound by the terms of the employment contract, a constructive dismissal is deemed to have occurred. In this way, the law ‘constructs’ the dismissal from the employers conduct, hence “constructive dismissal.” But make no mistake, although the dismissal is a legal construction, it is a dismissal nonetheless. As a result, the constructively dismissed employee could have a claim against their former employer for wrongful dismissal damages at common law and termination pay under the Employment Standards Act, provided that the employee has taken certain required steps (the steps an employee needs to take to bring a constructive dismissal claim will not be discussed in this blog post – if you are an employee who thinks you have been constructively dismissed, you should promptly seek the advice of legal counsel as delay may undermine your ability to make a claim).

Generally speaking, constructive dismissal occurs in either of the following situations:

1. Where the employer breaches an express or implied term of the employment agreement and the breach is substantial; or
2. Where the employer’s conduct generally shows that the employer no longer intends to be bound by the employment contract (in this type of situation, constructive dismissal can be found without the employee identifying a specific contractual term that was breached). For example, this may occur if the employer’s treatment of the employee made continued employment intolerable.

This blog post will focus on the first situation – a substantial breach of an express or implied term of the employment agreement.

Reductions in Compensation

An employee’s compensation is a term of their employment agreement with their employer. This is true regardless of whether or not there is a formal written employment contract. Even if the employer and employee have not reduced the terms of employment into a written document, an employment agreement still likely exists, albeit in unwritten form.

If an employer unilaterally reduces the employee’s compensation, such action would likely be a breach of the employment agreement. However, not every reduction of compensation amounts to constructive dismissal. It is a question of degree – the breach must be substantial to give rise to a constructive dismissal. That being said, an employee may still be entitled to damages for a minor breach of the employment contract by the employer, but in such a situation the employment agreement will continue to exist.

There is no bright line for determining when a reduction in compensation has crossed over from a minor breach to a substantial breach and, therefore, become a constructive dismissal; however, past decisions provide some guidance. For example in a 2009 British Columbia Supreme Court decision, the Court surveyed the case law and found as follows:

• failure to pay an employee up to approximately 9-10% of his or her average salary without more does not amount to a substantial breach;
• a failure to pay 14%-17% of an employee’s average salary may amount to constructive dismissal if there are other significant changes to the terms of employment; and
• a reduction in remuneration amounting to anywhere between 20-46% (and presumably anything greater) by itself has been held to amount to a substantial breach:

We stress, however, that these numbers are merely guidelines based on previous court decisions. They are not absolute rules. Determining whether a constructive dismissal has occurred is a fact specific exercise.

When making this assessment, it is important to remember that employees generally receive compensation beyond their salary. For example, benefits like car and phone allowances, stock options or bonuses. The reduction or removal of these benefits can give rise to constructive dismissal claims, although not always. Employers must consider the value of these benefits relative to the employees’ total compensation – if the benefit is a major component of the employee’s compensation, a unilateral reduction of such benefit is more likely to be a substantial breach of the employment contract. The flip side of this is that constructive dismissal might be avoided if a reduction in pay is accompanied by increases in other benefits. This gives employers some room to get creative. For example, an employer might be able to balance out a reduction in pay by providing the employee with equity compensation (i.e. providing the employee with shares in the company) or extra vacation days. However, there is no guarantee that this balancing act will avoid a finding of constructive dismissal, especially where the reduction in pay is significant. Therefore, if this approach is taken, it should be buttressed by having the employee consent to the change by signing a written amendment to their employment agreement setting out the reduced pay for increased benefits exchange. Keep in mind that an employer cannot force an employee to consent to a change.

There is at least one situation where an employer can unilaterally reduce an employee compensation without such change amounting to breach of the employment agreement. Namely, where the employment contract specifically allows the employer to adjust the employee’s compensation. In such cases, a reduction in pay is merely an exercise of the employers right, rather than a breach of the contract.

Temporary Layoffs Leading to Constructive Dismissal

COVID-19 has caused many employers to make the difficult decision to layoff staff. However, employers should be cautious before doing so. There is a common misconception that employers have a unilateral right to temporarily layoff workers, but this is not the case. It is only where the employment contract has a clause specifically allowing the employer to layoff the employee that an employer may unilaterally impose a layoff without incurring liability for wrongful dismissal. And even then, the layoff must not extend longer than the maximum period of time set by law. Currently during the COVID-19 pandemic, that maximum layoff period is 24 weeks if the layoff is for reasons related to COVID-19, but it is expected to be reduced back to its original 13 weeks on August 30, 2020.

In normal circumstances, if the employee has not been called back to work before the expiry of the permitted layoff period, the employment will be deemed terminated and the employee will become entitled to compensation for their loss of employment. COVID-19 might change things, however. The British Columbia government has updated its Employment Standards Interpretation Manual to state their new policy position that, “if a business closure or staffing reduction is directly related to COVID-19 and there is no way for employees to perform work in a different way (for example, working from home) an exception may apply to exclude employees from receiving compensation for length of service and/or group termination pay.”

Although the government’s new policy position sounds promising for employers who have been significantly affected by COVID-19, it may be of limited usefulness. First, this policy position does not have the force of law, it remains open to a court to interpret the Employment Standards Act in a contrary manner. Second, even if the government’s interpretation of the Employment Standards Act is correct, it only protects employers from liability under the Employment Standards Act. Employers may still have significant liability at common law unless the employee has specifically waived wrongful dismissal damages at common law in their employment agreement.

In the absence of a clause permitting the employer to layoff their employees, a layoff will be a dismissal unless:

• the layoff is normal and expected in the industry; or
• the employee has consented to the layoff.

Employees should note that their decision to refuse to consent to a layoff (with the result that their employment is ended) may affect their eligibility for federal government benefits, such as Employment Insurance.

Termination Pay

After the temporary layoff period has expired (24 weeks during COVID-19 pandemic if related to COVID-19, 13 weeks otherwise), employees who have not been recalled by their employer are deemed terminated and entitled to termination pay under the Employment Standards Act. Additionally, if the employee has not contractually waived their right to common law reasonable notice of termination, the employee could also be entitled to wrongful dismissal damages at common law. Depending on a number of facts, including the employee’s age and length of service, a wrongfully dismissed employee could be entitled to up to 24 months of pay.

What to do if an employee alleges constructive dismissal

If an employee has alleged constructive dismissal and resigned from their position, there are steps an employer can take to minimize their liability in the event of a constructive dismissal allegation. It is a general principle of contract law that where a party to a contract has breached their contract and caused the other party to suffer a loss as a result of the breach, the non-breaching party must take steps to mitigate their loss. The law does not permit the non-breaching party to recover damages for losses that they could have avoided had they taken steps to minimize or contain their loss. This principle also applies in the employment context.

As a result of the non-breaching party’s obligation to mitigate their loss, an employer can reduce their liability by offering the resigned employee new employment, either on new terms or on the same terms under which the employee was previously employed. In many cases, the employee will be obligated to accept the offer of new employment. Otherwise, the employee may have failed to mitigate their loss. However, employees are not always required to mitigate their loss by accepting re-employment with their former employer. They are only required to do so if a reasonable person would accept such an opportunity. Factors considered when making this determination include:

• whether the salary offered is the same;
• whether the working conditions are substantially different;
• whether the new work offered is demeaning;
• whether the personal relationships involved are acrimonious;
• whether the employee has commenced litigation;
• whether the offer of re-employment was made while the employee was still working for the employer or only after the employee had already left; and
• the history and nature of the employment.

The Supreme Court of Canada has held that, in making the determination of whether an employee is obligated to accept re-employment with their former employer, the “critical element is that an employee ‘not [be] obliged to mitigate by working in an atmosphere of hostility, embarrassment or humiliation.’” For this reason, where the constructive dismissal was the result of legitimate business downsizing or restructuring due to economic downturn, all other things being equal, courts are more likely to find that a constructively dismissed employee has a duty to mitigate their loss by accepting re-employment with their former employer.

Key Takeaways

Employment cost reducing strategies, such as temporary layoffs and salary reductions, can inadvertently cause constructive dismissals, thereby entitling the dismissed employees to termination pay and, potentially, wrongful dismissal damages.

Temporary layoffs are permissible only in limited circumstances. To temporarily layoff an employee, the temporary layoff must be no longer than the permissible temporary layoff period and must be:

• expressly provided for in the employee’s written contract;
• a customary industry practice; or
• agreed to by the employee in writing.

The employer must also have an intention to recall the employee once the layoff period is over.

Substantial reductions in compensation by the employer will generally be a breach of the employment contract, unless the employment contract specifically allows the employer to make downward adjustments to compensation, or unless the employee has consented and received some additional benefit for granting such consent.

If you have questions about constructive dismissal and its implications for your business, please contact Alon Segev at [email protected] or David McHugh at [email protected] or visit our Vancouver office or call us at 1-604-629-5400.

Disclaimer

The above blog post is provided for informational purposes only and has not been tailored to your specific circumstances. This blog post does not constitute legal advice or other professional advice and may not be relied upon as such.  Furthermore, due to the rapidly changing legal landscape with respect to COVID-19 and our government’s response to the pandemic, the information in this blog post may become out of date.