An employee’s benefits are an important component of the employment contract. They cannot be reduced during the employee’s tenure without their consent. If an employee’s benefits are reduced, this may amount to a constructive dismissal, in which an employer would be liable for certain damages for unilaterally changing the employment contract. Therefore, it is important to consider the legal implications of requiring a change in an employment contract, including reducing benefits in some way. 

The purpose of this post is to explain what can happen if employee benefits are reduced in an employment contract and what constitutes a constructive dismissal regarding reducing employee benefits and its legal implications. Also, this post will examine a case example, Brake v. PJ-M2R Restaurant Inc., 2017 ONCA 402, in which the court found that the employee was constructively dismissed due to a reduction in her benefits despite her salary remaining the same. Employers and employees can take away key takeaways from this post as they seek to understand their rights under an employment contract and prevent liability arising from changes to employment contracts.

What is a constructive dismissal?

First, it is important to understand a constructive dismissal and how it can arise with respect to changes to an employment contract. 

If there has been a change to a fundamental part of the employment contract, the employee may be considered constructively dismissed, although they are not explicitly terminated. Changes to an employment contract can include changes in the employee’s remuneration, job duties, job status, job content, or a demotion. Oftentimes, a combination of changes may amount to a constructive dismissal rather than just one change. Also, the extent of the change will be considered in determining whether there was a fundamental change in the employment contract to result in a constructive dismissal.

To find that there has been a constructive dismissal, the court must find that one or both of the two branches are satisfied. For the first branch, the court will determine whether a breach in the employment contract has occurred. The court must determine if the employer unilaterally changed the contract (i.e. without the employee’s consent). The court must also look to the terms of the employment contract at issue, as it may contain terms that allow the employer the ability to validly make the change if the employee consents or acquiesces to the change (i.e. the employee did not do anything to suggest they were opposed to the change, and did not challenge it when it occurred). The breach in the employment contract must also be detrimental to the employee. After a breach is established, the court must consider if a reasonable person in the same situation as the employee would have thought that the essential terms of the employment contract were being substantially altered. In other words, the test is not whether the actual employee thought the change was substantially altered but whether a reasonable person would come to this conclusion. 

In the second approach, the court would find a constructive dismissal where there has been conduct that would lead a reasonable person to believe that the employer no longer intended to be bound by the employment contract terms. This approach considers the specific circumstances of the events related to the dismissal. 

How does reducing employment benefits relate to constructive dismissal?

If an employer reduces an employee’s benefits, this may be a constructive dismissal if it is considered a fundamental change to the employment contract. The change would need to be significant enough to be considered a fundamental change. Also, it will be considered based on the circumstances, including any other changes that occurred, such as a change in salary, role, etc. To illustrate this, we will discuss the Brake case below, in which the court found that the employee was constructively dismissed as her benefits were significantly lower than her existing role with the company, while her salary remained the same. 

Court finds constructive dismissal where employee benefits reduced, despite same salary for the role

In the Brake case, the employee was a restaurant manager who worked for the company for over 25 years. Management approached her to change her role to First Assistant, which was considered a demotion. She was given the option to accept the new role or be terminated. She refused to accept the new role, so she was terminated. The employee was 62 at the time of termination. 

During her tenure at the company, she received excellent performance reviews until she was transferred to a new location, which suffered from high staff turnover. As a result, she was placed in the company’s progressive discipline program. The court found that the program was unfair to the employee due to the issues associated with that particular location and the fact that the program required higher standards than were expected during her tenure at the company. The employer concluded that the employee had failed the program and was being demoted to First Assistant, which would include the same salary but involve a “meaningfully inferior” reduction to her benefits. The demotion would mean that she would report to other employees she had trained and supervised and who had less experience than her, which would have been a humiliating experience, according to the employee. 

The court found that the employee exhibited a history of being a competent manager. At trial, she was awarded 20 months of pay in lieu of notice and a $6,000 car allowance, $1,307.76 for cell phone costs, and $2,391.84 for health benefits.

The employer appealed, arguing that the employee was not constructively dismissed based on a demotion and reduced benefits. 

However, the Court of Appeal upheld the trial court’s decision that the employee was constructively dismissed, as she was being offered a non-supervisory position with significantly reduced benefits, which amounted to a substantial change to her employment contract without her consent. 

Key Takeaways 

To find if there has been a fundamental change in an employment contract, the court will consider all of the circumstances of the case. A significant reduction in benefits can be considered part of a fundamental change to the employment contract. Still, the court will likely consider other factors, such as whether there was a corresponding demotion. 

Contact Toronto Employment Lawyer Paulette Haynes Law for Advice on Constructive Dismissal Claims

Employment Lawyer Paulette Haynes can assist you with constructive dismissal claims. If an employer unilaterally changes a fundamental term of the employment contract, this can result in a constructive dismissal, which may lead to damages for the employee. For employees, our goal is to ensure that they understand their rights and receive maximum compensation in constructive dismissal cases. Haynes Law Firm also assists employers in avoiding liabilities that may arise from constructive dismissal claims. We are dedicated to finding the best resolution for you.

To book a consultation, please contact us online or by phone at 416-593-2731.