Update on the Law of Constructive Dismissal

Update on the Law of Constructive Dismissal

By: Joseph Oppenheim and Lauren Barteluk

On March 6, 2015 the Supreme Court of Canada released its reasons for judgment in Potter v. New Brunswick (Legal Aid Services Commission), 2015 SCC 10. In it, the Court clarified the law on constructive dismissal for the first time since Farber v. Royal Trust Co., [1997] 1 S.C.R. 846.

The issue in Potter was whether and in what circumstances a non-unionized employee who is suspended with pay may claim to have been constructively dismissed. The Supreme Court held that on the particular facts of this case, the suspension constituted a constructive dismissal.

Clarification of the test for constructive dismissal

The Court restated its approval of the principle set out in Farber and confirmed that it is the leading case on the law of constructive dismissal in Canada. The Court summarized the Farber principle as follows:

When an employer’s conduct evinces an intention to no longer 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.[1]

The Court supported the flexible approach that Courts have taken in applying Farber because “employment contracts are dynamic in comparison with commercial contracts.” It noted that the state of the law has evolved such that courts have found constructive dismissal in two distinct forms, thereby creating two “branches” of the test for finding constructive dismissal:

“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.” [2]

The first branch of the test is most often applied, typically in cases where there has been substantial and unilateral changes to the employee’s compensation, work assignments or place of work. It requires the court to first determine whether the employer’s unilateral change breached an express or implied term of the contract. If so, the court will then determine whether the breach was sufficiently serious to constitute constructive dismissal. It is an objective test. Would a reasonable person in the same situation as the employee have felt that the essential terms of the employment contract were being substantially changed?

The second branch of the test allows for a constructive dismissal to be found even if there is not a breach of a specific term of the contract. In this scenario, the court assesses whether the employer’s conduct generally shows that it intended not to be bound by the employment contract. This requires a retrospective consideration of the cumulative effect of past acts by the employer and a determination of whether those acts evinced such an intention. Again, it is an objective test, involving an assessment of how a “reasonable person” in the employee’s situation would have felt.

The Court’s reasons

The reasons of the majority of the Court were written by Wagner J. He held that Mr. Potter could only succeed on the first branch of the test for constructive dismissal because his case centred on the unilateral imposition of an administrative suspension. There was no other conduct of the employer to consider, and therefore the second branch of the test was unnecessary. On review of the written contract, Wagner J. noted that although the employer had the right to suspend for disciplinary purposes, there was no express provision dealing with administrative suspensions. The Court did not accept the employer’s argument that it had the implied authority to impose the administrative suspension.

The majority concluded that Mr. Potter was constructively dismissed because the suspension was unauthorized, unjustified and unreasonable. The Court noted that the suspension was for an indefinite term, the employer did not give Mr. Potter any legitimate business reasons for the suspension, Mr. Potter’s role was filled by another employee during the suspension, and the employer had a concealed intention to have Mr. Potter terminated. The majority of the Court deemed this to be a substantial breach of the employment contract, and therefore the first branch of the test was met.

The two-justice minority was in agreement with the result but for different reasons, as written by Cromwell J. They found that the suspension constituted constructive dismissal because it evidenced that the employer no longer intended to be bound by the contract, thus satisfying the second branch of the test. Cromwell J. wrote that it was not necessary to inquire as to whether the employment contract authorized an administrative suspension. He stated, “Even assuming that it did, the suspension in this case, viewed as it must be in light of all of the surrounding circumstances and the correct legal principles, showed that his employer did not intend to be bound in the future by essential terms of the contract of employment.”

Implications of Potter

The law has been clarified, but not substantively changed
It is now clear that courts are required to assess two separate and independent indicia within the first branch of the test. However, much remains the same. Courts will continue to assess constructive dismissal claims on the facts of each particular case and it is the employee who has the primary onus of proof.

Administrative Suspensions
This decision provides guidance specifically with respect to administrative suspensions (as opposed to disciplinary suspensions). First, an employer must have the authority to impose an administrative suspension. If authority is not given by the written employment agreement, the Court will assess whether an employer has demonstrated that it had implied authority.

Second, generally employers have no obligation to provide work to their employees. However, there are exceptions to this. One such exception is where the employee derives a reputational benefit from being able to perform the work. Such is the case where the employee is identified as the face of an organization or where the employee works in the public eye. Another exception is where an employee is compensated by earning commissions. In such cases, there is an implied obligation to provide work, and suspending that employee will constitute a breach of this implied contractual term. However, even if an employee does not fit within an exception (and there is no implied obligation to give work), the employer must still act in good faith and with justification in suspending the employee.

Third, an employer does not have implied authority to place an employee on an administrative suspension unless it has a business justification to do so. If there is no legitimate business reason for the suspension, the suspension is not authorized and is therefore a breach.

Fourth, while an employee has the burden to establish constructive dismissal, the burden shifts to the employer to show that an administrative suspension is reasonable and justified.

Evidence
The Court addressed the question of whether relevant information that was not known by the employee at the material time is admissible. The majority held that it is for the limited purpose of determining whether a breach of contract occurred. However, it would not be relevant for the purpose of determining whether the essential terms of the employment contract were being substantially changed or whether the employer’s conduct generally evinced an intention not to be bound by the terms of the contract. Wagner J. stated that the rationale for this:

Such an approach would risk encouraging disgruntled employees who have quit their jobs to allege constructive dismissal and engage in fishing expeditions against their employers in the hope of identifying evidence in support of their claims.

This comment may lead to interesting disputes about the admissibility of evidence, and may be used as a basis to resist employees’ efforts to obtain documents in the litigation process.

Summary

This case is a reminder that employers must act with caution in making changes to the employment relationship. Courts generally consider employees to be inherently vulnerable in the employment relationship. It is reasonable to expect that courts will tend to protect employees from what is perceived to be unfair treatment.


1 Paragraph 30

2 Paragraph 43