Constructive Dismissal 101

Introduction

On 29 May 2020, the government of Ontario made a new regulation under the Employment Standards Act, 2000, SO 2000, c 41 (“the ESA”). The regulation, known as Regulation 228/20 (“the Regulation), purports to limit the ability of employees to claim constructive dismissal. However, if one is not familiar with the law of constructive dismissal, the effect of the regulation may be unclear.

What is constructive dismissal?

Normally, dismissal occurs when the employer chooses to end the employment relationship. However, it is also possible to dismiss an employee without intending to do so. This second type of dismissal is known as constructive dismissal.

The leading case on constructive dismissal is Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10 (“Potter”). In Potter, the Supreme Court of Canada held that constructive dismissal can occur in two ways. Firstly, constructive dismissal occurs where the employer breaches an express or implied term of the employment contract, and the breach substantially changes the terms and conditions of employment. Secondly, constructive dismissal occurs where the employer’s conduct would lead a reasonable employee to conclude that the employer intends to no longer be bound by the employment contract.

The first type of constructive dismissal

In order to establish the first type of constructive dismissal, the employee must establish 1) that the employer breached an express or implied term of the employment contract and 2) that the breach substantially changed the terms of employment. In other words, it is not enough to prove that the employer breached the employment contract; the employee must also prove that the breach changed the employment relationship in a substantial way. For example, while a significant reduction in pay will likely constitute constructive dismissal, a less significant reduction may not. In Ontario, courts have suggested that a reduction of 20% or less will generally not constitute constructive dismissal, but this is not a hard rule.

Importantly, constructive dismissal can occur even if there is no change in compensation. Demoting an employee can also constitute constructive dismissal, as can changing an employee’s hours of work or working conditions. The COVID-19 pandemic has forced many employers to resort to significant pay reductions and temporary lay-offs. Ordinarily, the affected employees would be able to claim constructive dismissal. However, the Regulation states, if an employee suffers a temporary pay reduction or is temporarily laid off for more than 13 weeks as a result of COVID-19, the employee may not claim constructive dismissal.

The Regulation has not yet been considered by the courts. While the government clearly intends to protect employers from pandemic-related constructive dismissal claims, it remains to be seen whether the Regulation will have the desired effect. Notably, constructive dismissal is a common law concept, and the ESA has never been interpreted as overriding the common law. If the ESA preserves the common law, it is not clear how a regulation made pursuant to the ESA could affect the common law right to claim constructive dismissal. Moreover, the Regulation is silent on the matter of claims for breach of construct. This is a significant omission, since the same act—such as a unilateral reduction in pay—can constitute both constructive dismissal and breach of contract.

The second type of constructive dismissal

In order to establish the second type of constructive dismissal, the employee must demonstrate that the employer’s conduct has made continued employment “intolerable.” The test is whether a reasonable person in the employee’s position would conclude that the employer had repudiated the employment contract. This type of constructive dismissal can occur even if the employer has not breached a specific term of the employment contract. It is intended to capture situations where the relationship between the employer and the employee has broken down, and the employer’s conduct is essentially incompatible with continued employment. For example, abusive conduct by the employer can amount to constructive dismissal, as can the employer’s tolerance of or failure to investigate abusive conduct by other employees.

Conclusion

The government has taken steps to protect employers from constructive dismissal claims arising from the COVID-19 pandemic, but only up to a point, and only with respect to the first type of constructive dismissal. Even if the Regulation is found by the courts to have its intended effect, it will not protect employers who attempt to make their pandemic arrangements permanent. Employers should not take the pandemic as a licence to unilaterally rewrite their employees’ contracts.