As published in Exchange Magazine March/April 2011

The economic downturn has lead many businesses to make difficult decisions in order to survive.  Often these decisions lead to changes in the terms and conditions of individual employment arrangements most noteably, a reduction in salary or incentive based remuneration.

These changes can amount to what is called “constructive dismissal”.

A constructive dismissal occurs when an employer makes a unilateral change to the fundamental terms and conditions of employment AND the changes are not condoned or accepted by the employee.  The question often asked is, have the changes substantially altered the essential terms of an employee’s conditions of employment.

This is an important question for an employer to consider before implementing changes which could lead to a claim by an employee of constructive dismissal.

Historically, when faced with a situation of constructive dismissal, an employee would indicate that he or she is not prepared to accept the changes, quit and sue for damages.  The employer’s defence to such a claim is that the employee voluntarily resigned; the changes in the terms and conditions of employment are not fundamental and deny any liability.

In a recent Ontario Superior Court constructive dismissal decision, rather than resigning the employee continued in his position while suing his employer.  In Russo v. Kerr Brothers Ltd., Russo sued his employer after a significant reduction was made in his compensation.

The employer, Kerr Brother is a manufacturer of candy products.  It began to run into financial difficulty in early 2000.  Russo was employed as the warehouse manager.  In 2009, a new President, Fayez Zakaira arrived.  Zakaira determined that the remuneration packages for all employees exceeded what was competitive in the market place and implemented a  10% reduction in  salaries and dissolved the RRSP matching program.  In addition, Zakaira reduced Russo’s salary from $85,000.00 annually to $60,000.00 and discontinued his annual bonus of $30,000.00.

At the time,  Russo was in his 50’s and had been employed with Kerr for 37 years.  Russo never completed highschool, and with the exception of on the job training, had no other formal education or training.

Russo retained a lawyer who sent a letter to Zakaira advising that the reduction in salary and loss of the bonus amounted to constructive dismissal and that Russo did not accept or agree to the changes. Rather than quit, Russo remained employed and initiated a constructive dismissal action.  Russo most likely pursued this rather unconventional course of action, recognizing that given his age and limited education, it may be  difficult to find employment, and remaining employed, albeit at a reduced salary, was preferable to quitting and having no source of income.

As there was no real factual dispute between the parties, rather than wait for the matter to proceed to a trial, Russo moved for a legal determination of the issue and brought a motion for summary judgment.

He was successful.  The motion’s judge found that through the lawyer’s letter Russo had  communicated two things:

first, that the unilateral change in the terms and conditions of his employment constituted constructive dismissal; and

second, that Russo did not consent to the alteration to his compensation plan.

Principles of constructive dismissal require the employee to make an election as to whether they are prepared to accept the changes introduced by the employer.  According to the motion’s judge, once Russo had communicated his election to not accept the new terms, Kerr could have told Russo to leave the workplace [thereby ending employment triggering a legal obligation to provide notice or pay in lieu thereof] or kept the old terms and conditions in place and given reasonable notice of the future change. In this instance, Kerr did neither.  It simply allowed Russo to remain in the workplace knowing that he took the position that he had been constructively dismissed and did not accept the new terms of employment .  In the circumstances, the motion’s judge found that Kerr must be taken to have understood that Russo was remaining in the workplace, but not accepting any changed terms and conditions of employment.

The motion’s judge assessed a 22 month period of notice and awarded partial summary judgment in favour of Russo in the amount of  $82,000.00 representing the shortfall in his earnings from the date of the compensation reduction  to the date the motion was heard.

As the Russo decision provides employees with an effective tool to obtain a quicker determination of constructive dismissal claims it is important for employers who are considering making changes to get advice at the earliest opportunity  to minimize the prospect of these types of proceedings.