Relaunching Business: Constructive Dismissal and COVID-19

As employers around the country begin preparing to eventually resume their operations, many will be required to restructure their operations to comply with physical distancing rules aimed at limiting the spread of COVID-19. For some, this will mean opening in a reduced capacity or providing only some of their previously offered services to the public.

In many cases, employers will not be positioned to recall all laid-off staff to the exact same job duties or on the same terms and conditions of employment as they did before COVID-19. This could mean reduced hours, reduced wages, the elimination of some employee perks and/or different job duties.

Beyond the usual business considerations, employers should also be aware of possible legal risks that arise when unilaterally changing the terms and conditions of employment for existing employees. It is possible that employees unhappy with what their employer is offering them may file a wrongful dismissal claim on the basis of constructive dismissal.

Constructive dismissal may arise when an employer unilaterally makes substantial changes to the essential terms of an employee's contract of employment and the employee does not agree to the changes. Put another way, an employer's conduct will constitute constructive dismissal if it shows that the employer intended not to be bound by the contract. Even though the employee has not been formally dismissed, the common law treats this situation as a termination, with the usual rules around notice periods owing applying.

This means that employers who make substantial changes to their employees' contracts without their consent may face wrongful dismissal lawsuits and end up liable for a significant amount of pay-in-lieu of notice. The risk is particularly acute for long-term employees without enforceable contracts that limit their entitlement to notice. These employees may be entitled to months or years of notice, depending on the nature of the work and the personal circumstances of the employee.

A common question from our clients is whether they can impose wage reductions on all employees to avoid having to permanently let go of any employees. Not all wage reductions will necessarily constitute constructive dismissal. The courts have imposed a sliding scale in terms of how great a reduction in compensation must be to form a constructive dismissal. This range is also impacted by the existence of other changes to the employment contract, such as a change in job duties or place of work. The key question to keep in mind when making unilateral changes is always whether the employer's conduct would lead a reasonably minded person to conclude that the employer no longer intended to be bound by the terms of the contract.

The question naturally arises as to whether the reasonable person would consider some changes to be understandable given the economic and public health situations confronting Canada, and indeed the world? The answer to that question is not yet clear and may remain unknown for the medium-term as courts eventually re-open themselves and grapple with how to respond to our changed world.

Of course, employers can protect themselves from constructive dismissal claims by seeking and obtaining the support of employees to the alterations to the employment contract in exchange for some measure of consideration. Employers may also protect themselves from constructive dismissal claims arising from some types of unilateral changes by providing employees with working notice of the changes commensurate with the notice period employees would be entitled to in their employment contracts or at common law.

The information in this update is intended as general information and should not relied on as legal advice.