How to Prevent Constructive Dismissal Claims

Small businesses are constantly changing to meet the needs of their customers, to deal with economic conditions, and to evolve with dynamic technologies. These changes inevitably impact the roles and responsibilities of your employees. How do you ensure that changes to an employee’s position, title, responsibilities or pay doesn’t land you in hot water or result in a constructive dismissal claim? We offer some tips and advice, courtesy of our legal colleagues at McCarthy Tetrault LLP.

What is constructive dismissal?
Constructive dismissal is a situation where an employer has not directly fired an employee. Instead, the employer has changed the employment agreement in such a significant way that the employee quits. Since the resignation was not voluntary, it can be considered as a termination by the courts.

Main types of constructive dismissal
There are two main scenarios under which an employee can make a claim for constructive dismissal:

1. Intolerable workplace

  • The work situation has become intolerable for the employee to continue to work, or the employer treats an employee in such a manner that makes working there impossible.
  • This could include bullying, harassment or any other inappropriate behaviour that would prevent a reasonable person from being able to do their work.

2. Unilateral change of an essential term of employment

  • A unilateral change is a change of an essential term made without the agreement of the employee.
  • The change must be substantial and detrimental to the employee.
  • The primary test is to determine whether a reasonable person would feel that the essential terms of their employment were substantially changed.
  • What are the “essential terms” of an employment agreement? They include, but are not limited to, the following:
    • position;
    • responsibilities;
    • hours of work;
    • pay;
    • severance terms;
    • reporting relationships;
    • work location; and
    • prestige/status.
  • Some examples of a change of an essential term include:
    • demotion;
    • substantial changes to job duties and responsibilities; and
    • significant pay cuts or eligibility for bonus.

Duty to mitigate damages

An employee who has quit as a result of a constructive dismissal is required to take reasonable steps to mitigate any damages by looking for new employment. This duty may require an employee to accept a reasonable offer of re-employment. This requirement would be waived if the circumstances are such that it would be unreasonable for the employee to return to work.

When is it reasonable for the employee to turn down a re-employment offer?

  • There no longer is trust between the employee and the company;
  • The offer would not make the employee “whole”;
  • There is an intolerable workplace atmosphere;
  • The new position is substantially different from the employee’s previous position; or
  • The employee would be paid less in the new position or lose the ability to earn bonuses.

Prevention of constructive dismissal claims

As a small business owner, how can you proactively prevent a constructive dismissal claim?

  • Keep your work environment respectful and free of bullying, harassment and hostility.
  • Ensure changes affecting your employee are made honestly and for legitimate business reasons.
  • Talk with your employee prior to implementing a significant change.
  • If you offer your employee a different position, ensure the responsibilities and total compensation are comparable to their prior position.
  • Confirm the changes in writing and get your employee to sign off on the change. If the employee consents to a significant change, be sure to provide new consideration in exchange for the change. With the employee consenting to the change, it is no longer unilateral.
  • If you need to make a unilateral and substantial change, provide your employee with reasonable notice of the change. Reasonable notice would be the same notice that you would provide if you were terminating their employment.
  • Ensure your employment agreement includes terms that provide you with the right to unilaterally change certain essential terms. For example, by including terms that authorize and contemplate transfers, changes in duties, or changes in pay structure at the beginning of the employment relationship, can help protect you against constructive dismissal claims.

Always treat your employees with honesty and in good faith. Don’t treat someone poorly and hope they’ll quit so you don’t need to pay severance.

Making significant changes to your employee’s employment situation can be quite complex, so it is recommended that you consult with an employment lawyer or a human resources consultant to ensure your legal obligations are met, prior to effecting the change to the employment relationship to avoid a possible constructive dismissal claim.


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