Constructive dismissal revisited

October 2006

Constructive dismissal revisited

bouton-vers-francaisCarlos Medina
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The notion of constructive dismissal has always been a source of debate. Indeed, the concept is not defined in any legislative text, be it the Civil Code of Québec or the Act respecting labour standards. For many years, there have been as many definitions as there have been decisions rendered by the courts on this topic.
Fortunately, in 1997, the Supreme Court of Canada had the opportunity to rule on this notion and provided the following definition:

"Where an employer decides unilaterally to make substantial changes to the essential terms of an employee's contract of employment and the employee does not agree to the changes and leaves his or her job, the employee has not resigned, but has been dismissed. Since the employer has not formally dismissed the employee, this is referred to as "constructive dismissal". By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and is therefore terminating the contract."

Most employers think there is only one type of dismissal— dismissal in which there is a complete and final breakdown of the employment relationship between the employer and the employee. Formal dismissal is still the most common means of terminating an employment contract.

Over the years, the law regarding dismissal evolved as a result of decisions rendered by courts required to interpret and rule on specific situations. These decisions dealt with situations in which an employer had made changes to an employee's working conditions, usually in a unilateral manner and without seeking the employee's consent.

It is against such a backdrop that the notion of constructive dismissal developed over the years to protect an employee whose essential terms of employment had been changed without the employee having been provided with the opportunity to give his or her prior consent to such changes.

In cases of constructive dismissal, there is no definitive breakdown in the employment relationship between the employer and the employee. Indeed, constructive dismissal arises when an employer changes the working conditions of its employee without the employee's authorization. The test developed to determine whether a situation is one of constructive dismissal focuses on the presence of substantial changes to the terms of an employment contract.

Notwithstanding the definition provided by the Supreme Court of Canada, the application of these principles may be difficult or problematic in certain cases. This is why, since 1997, our courts have continued to render decisions on the notion of constructive dismissal.

Recently, in Drolet v. Re/Max Québec Inc., the Superior Court was called upon to rule on the application of the principles and conditions relating to the notion of constructive dismissal.

The employee had worked for Re/Max since 1987 and had held the position of Vice-President of Operations since 1988. Her duties had grown over the years and she had been given more and more responsibilities within the Re/Max franchisor throughout the Province of Québec. Among other things, the bonus program offered by Re/Max to its employee had increased substantially due to the expansion of the Re/Max real estate banner as a result of the growth and increase in the number of Re/Max franchised offices and agents.

All proceeded smoothly, for both the employer and the employee, from 1988 until 2001. Suddenly and unforeseeably, the employer decided to make negative comments and express its dissatisfaction with the performance of its Vice-President of Operations, in an overall context in which it concluded that the earnings and profitability of Re/Max as a franchisor had not increased as it had wished.

In addition to meeting with its Vice-President of Operations, the employer provided her with a letter in which it informed her that her role within the company, the scope of her duties and mandates, as well as her remuneration would have to be reviewed. The employer then invited her to discuss these elements but also gave her an ultimatum, stating that if no agreement could be entered into between them, her employment would terminate on a specific date.

The employee was both stunned and shattered by the contents of her employer's letter as well as by the comments made to her by the employer at the meeting where she was given the letter. After some thought, the employee replied in writing to the President of Re/Max asking for a meeting. The President of Re/Max refused such a meeting, but failed to formally state this to his Vice¬President of Operations. During the same period of time, the President of Re/Max made significant vice-presidential appointments within his company, without first informing his Vice-President of Operations who learned of these appointments by chance or from third parties.

One year later, another meeting took place between the President of Re/Max and his Vice-President of Operations. He asked her when she was going to retire and also informed her that her responsibilities within Re/Max would be changed. The meeting ended with the President of Re/Max expressing recriminations against the employee regarding the company's financial results and assigning all the blame to her.

A few months later, the President of Re/Max once again called his Vice-President of Operations to a meeting held on December 24th, a day on which the employee was not even supposed to be working. The meeting lasted more than two hours, during which time the President of Re/Max saw fit to answer six telephone calls which he received while his employee was there. Finally, he informed her that her responsibilities and compensation method would be modified, including the system for calculating her bonuses.

The Vice-President of Operations received confirmation of these changes some weeks later and there was an exchange of correspondence between her and the President of Re/Max for a few months in order to clarify the contents of that confirmation. At the end of these exchanges, the Vice-President of Operations refused the proposal that had been made to her, because, notwithstanding the change in her title, her responsibilities would remain the same as before, although there was a possibility she would suffer a 40% decrease in her total remuneration. She concluded that the changes that were to be imposed on her regarding the financial elements of her remuneration constituted a substantial change to the terms of her employment contract. The Vice-President of Operations had no alternative but to resign from her position and did so, giving her employer prior notice in order to ensure a smooth transition of her tasks.

The specific characteristic of constructive dismissal is that no formal dismissal is made or announced by the employer to the employee. In fact, during the trial, the President of Re/Max confirmed on several occasions that he had not wanted to dismiss his Vice-President of Operations. He therefore viewed her resignation as untimely and unjustified.

In its ruling, the Superior Court rejected all of the arguments submitted by Re/Max as a defence to the constructive dismissal proceedings instituted by its Vice-President of Operations. The employee's responsibilities and remuneration were important elements of the position she held. These were essential terms of her employment contract which she enjoyed for a period of 9 years before her resignation.

After reviewing and analyzing the letters in which the employer had set out its proposals, the Court concluded that the proposed amendments constituted substantial changes to the conditions of employment of the Vice¬President of Operations. It found that Re/Max wanted to impose upon its employee a significant reduction in her total remuneration, by replacing the objective method for calculating bonuses with a completely discretionary method contingent on the existence of undefined elements.

In arriving at this conclusion, the Court also considered the overall context and the manner in which meetings between the President of Re/Max and its Vice-President of Operations had unfolded. This was fundamental in determining the employee's perception of events at the time they had unfolded.

This method of analysis was developed by the Supreme Court of Canada which described it as follows:

"To reach the conclusion that an employee has been constructively dismissed, the court must therefore determine whether the unilateral changes imposed by the employer substantially altered the essential terms of the employee's contract of employment. For this purpose, the judge must ask whether, at the time the offer was made, a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed."

The President of Re/Max continuously complained about the company's decreasing revenues, while making veiled allusions blaming the employee for those reduced revenues. The President's attitude and failure to respond to his employee's requests showed a flagrant disrespect towards the employee. Each time he met with her, he denigrated her contribution to the company during the 16 years she had worked there. He called her to a meeting on Christmas Eve, when she was supposed to be on vacation, and made her wait for half of that 2 1/2-hour meeting while he answered one telephone call after another. He appointed other vice-presidents without consulting her or giving her prior notice. He asked her when she was going to retire. He presented her with an ultimatum, mentioning that if no agreement could be reached between them, he would have to terminate her employment.

The Court went even further in its analysis, concluding that the essential terms of an employment contract are not comprised merely of the financial elements. Given that the employee had held the second most senior position in the company for over 10 years, the Court concluded that, as an essential term of her employment agreement, the employer was required to treat her in a courteous and respectful manner. The Court reproached the employer for the overall treatment the Vice-President of Operations was subjected to, as of 2001, for a period of more than 12 months during which she found herself in a precarious situation, fraught with uncertainty, while her employer sought to impose changes presented to her randomly over an extended period of time.

The Court therefore concluded that the Vice-President of Operations had been the victim of constructive dismissal by her employer, Re/Max.

As for the damages awarded to her, the Court was satisfied that the evidence presented by the employee demonstrated that she had fulfilled the obligation to mitigate her damages. She demonstrated that she had made reasonable and necessary efforts to find other employment similar or equivalent to her employment at Re/Max, with the same level of remuneration with respect to salary and benefits. The Court therefore concluded that the 20 months the employee had had to wait before finding other employment was reasonable under the circumstances. The severance pay was therefore calculated on the basis of this period.

The employee also claimed moral damages against her former employer. After pointing out that, under normal circumstances, the Civil Code of Québec allows an employer to terminate an employment contract without justification, conditional upon the payment of a reasonable indemnity, the Court concluded that constructive dismissal causes an employee to suffer inconvenience and unpleasantness not experienced when an employee is formally dismissed. Therefore, the Court did not see how an employer could create such a situation in the work environment without committing a fault.

The Court awarded moral damages of $25,000 to the employee. It justified this amount by relying on the fact that a period of 18 months had elapsed between the moment when the employee had been given the first letter indicating the employer's intention to amend her employment contract and the moment when the employee had been forced to resign because no agreement had been reached. Given the constructive nature of the dismissal, the Court was of the opinion that the employer had caused its employee to suffer inconvenience, stress and humiliation beyond what is to be expected in cases of formal dismissal. The employer's behaviour caused the employee to feel insecure, isolated and insulted, eventually leading to her resignation. The employee experienced this situation over a period of 18 months, during which she lived through a daily hell which she neither understood nor deserved.

The decision in this case, which was not appealed, is an eloquent example of the application of the notion of constructive dismissal. The employer's conduct and the faults committed by it in modifying the working conditions of its Vice-President of Operations explain and justify the serious nature of the Court's findings against the employer.

Many employers wrongfully believe they can escape responsibility by not formally dismissing an employee. Instead, they use a strategy similar to that used by Re/Max in order to compel, lead or induce an employee to accept changes to his or her working conditions. If the employee does not accept them and they constitute significant changes to the essential terms of the employee's employment contract and if the employer continues to impose these changes, the employee will be justified in resigning and invoking the notion of constructive dismissal, with all the resulting consequences arising from a claim for compensation for the harm suffered.

Employers must therefore be prudent when undertaking such changes and should preferably check with a labour lawyer to ensure that they are not creating a situation liable to give rise to proceedings for constructive dismissal. In such a case, it may be possible to find a strategy and solutions before the employer's conduct towards its employee results in an unfortunate situation. In cases such as this, an ounce of prevention is most definitely worth a pound of cure.

This bulletin provides general comments on recent developments in the law. It does not constitute and should not be viewed as legal advice. No legal action should be taken on the basis of the information contained herein.



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