Most employers understand what it means to terminate an employee. Typically, they deliver the news, provide the requisite documentation, and comply with any necessary statutory or contractual obligations. But not every termination happens this way. Sometimes, the process is less straightforward and more ambiguous. This is true in the case of constructive dismissal.
Constructive dismissal occurs when an employee interprets their employer’s actions as ending the employment relationship. This carries significant repercussions; when an employee is constructively dismissed, they may take legal action and sue their (now former) employer. No employer wants to deal with constructive dismissal claims, as they can be both stressful and costly. However, careful planning and clear policies can drastically reduce the likelihood of a constructive dismissal claim coming to fruition.
In this blog, we go into more depth about constructive dismissal. After explaining what it is, we review the Supreme Court of Canada’s leading decision on the subject in Potter v. New Brunswick Legal Aid Services Commission. We then identify some of the most common examples of constructive dismissal in the workplace and provide practical tips for employers to protect themselves from constructive dismissal claims.
What Is Constructive Dismissal?
Constructive dismissal occurs when an employer makes a significant change to an employee’s job without their consent. The law treats this as a termination, even if the employer never intended to dismiss the employee.
In Ontario, there are two main categories of constructive dismissal:
- A major unilateral change to a fundamental term of employment. This might involve the employee’s pay or duties.
- A pattern of behaviour that shows the employer no longer intends to be bound by the employment contract. This might involve repeatedly changing the employee’s duties or failing to provide them with work.
Employees who are constructively dismissed may resign and then argue that they were forced out. If the court agrees, employers may be liable for considerable damages.
Leading Case: Potter v. New Brunswick Legal Aid Services Commission
The Supreme Court of Canada dealt with constructive dismissal in Potter v. New Brunswick Legal Aid Services Commission. The seminal 2015 case concerned David Potter, who was appointed as the Executive Director of the New Brunswick Legal Aid Services Commission for a seven-year term. Ultimately, the relationship between Potter and his employer broke down, and they started negotiating an early end to the contract. At the same time, Potter went on sick leave. While he was on leave, Potter received an indefinite administrative suspension without pay and without explanation. Potter sued the Commission for constructive dismissal.
The primary issue before the Supreme Court was whether Potter’s indefinite suspension constituted constructive dismissal. The Commission argued that Potter had voluntarily resigned by initiating legal action. However, the Court found that the Commission’s imposition of an indefinite suspension constituted a breach of the employment contract and decided in Potter’s favour. In its ruling, the Court emphasized that an employer has an implied obligation to provide an employee with work, and an indefinite suspension without proper communication can therefore constitute constructive dismissal. The Court also outlined the following two-part test for constructive dismissal:
- Did the employer unilaterally break an express or implied term of the contract?
- Would a reasonable employee in the same circumstances consider the break substantial enough to treat the contract as terminated?
If the answer to both questions is “yes,” then the employee has been constructively dismissed.
Common Examples of Constructive Dismissal
Indefinite suspension without pay isn’t the only grounds for constructive dismissal. Other common examples of constructive dismissal in Ontario include:
1. Reduction in Pay
When an employer significantly cuts an employee’s salary with no valid reason, it can qualify as constructive dismissal. This may also apply to other forms of compensation, such as commission rates, bonuses, and benefits.
2. Major Job Changes
Another way for an employer to engage in constructive dismissal is by altering key aspects of the employee’s job, such as duties, hours, or work location. These changes need to be explicitly stated in an employment contract.
3. Toxic Work Environment
A toxic work environment might include persistent harassment, bullying, or unsafe working conditions. Left unaddressed, these issues can create the conditions for constructive dismissal.
How to Avoid Constructive Dismissal Claims
Constructive dismissal claims can be expensive, stressful, and negatively impact an employer’s reputation. However, employers can take steps to avoid them, including:
1. Communicating Clearly
Before making changes to an employee’s role, compensation, or schedule, the employer should clearly explain the rationale, provide advance notice, and obtain written consent.
2. Using Well-Drafted Employment Agreements
A strong employment contract should:
- Clearly define the employee’s duties
- Reserve the right to modify roles, responsibilities, etc.
- Include an enforceable termination clause
3. Keeping Workplace Policies up to Date
Every employer should maintain official policies concerning:
- Harassment
- Compensation
- Remote work
- Discipline and suspension
Policies should be reviewed regularly to ensure they remain current and effective.
4. Seeking Legal Advice Before Implementing Major Changes
To minimize the risk of constructive dismissal, employers should seek legal advice before implementing any major business decisions.
Maintaining a Productive, Supportive Workplace
Understanding constructive dismissal in Ontario is crucial for employers and employees alike. It can arise from a single unilateral change to a fundamental term of employment or from a pattern of behaviour indicating that the employer no longer intends to be bound by the employment contract. Common examples include pay reductions, major job changes, a toxic work environment, or, as in the case of Potter, an administrative suspension. Fortunately, employers can take proactive steps to reduce the risk of constructive dismissal claims. By communicating clearly, drafting strong employment agreements, keeping workplace policies up to date, and seeking legal advice before implementing major business decisions, employers can minimize their exposure and prevent disputes, all while creating a better work environment for all.
Contact Haynes Law Firm for Modern Employment Law Services in Toronto
Constructive dismissal claims can expose Ontario employers to significant liability, even where termination was never intended. If you are considering changes to compensation, duties, workplace structure, or disciplinary measures, proactive legal guidance is essential. Paulette Haynes, founder of Haynes Law Firm in Toronto, advises employers on risk management, contract drafting, and compliance strategies designed to prevent constructive dismissal claims before they arise. Contact our firm online or call (416) 593-2731 to assess your workplace practices and protect your business with informed, strategic counsel.
