Legislative Compliance

How to Avoid Constructive Dismissal Claims

September 5, 2023

Dramatic changes to the economy, including labour shortages and inflationary pressures, are changing the way companies operate. Workplaces throughout Canada continue to make both operational and budgetary decisions to adapt to the ever-changing economy and stay competitive. Part of this adaptation means changing employee job roles and tasks. A little change is normal, but sometimes employers need to make major changes, which can lead to constructive dismissal claims.

Wrongful dismissals can cost employers thousands of dollars or more in punitive damages. Organizations can avoid legal and financial risks by being fair, respectful, and considerate to their employees. To avoid constructive dismissal claims, be sure to also follow our expert advice below.

What is constructive dismissal?

A Supreme Court of Canada decision resulted in this commonly used definition of constructive dismissal:

“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. The employee can then treat the contract as resiliated for breach and can leave. In such circumstances, the employee is entitled to compensation in lieu of notice and, where appropriate, damages.”

Examples of Constructive Dismissal

Breaches of monetary or non-monetary employment conditions can result in constructive dismissal. In all the following examples, the change must be substantial and unilateral:

  • Reduced compensation, such as significant decrease in salary, commission, bonus, benefits or pension entitlements, or a removal of benefit entitlement.
  • Demotion, such as downgrading an employee’s duties, job description, title, or rank.
  • New work location, such as moving an employee’s place of work to a significantly farther location.
  • Change in hours or shifts, such as changing day shifts to evening shifts.
  • Toxic work environment, where an employer creates or fails to address issues like harassment, sexual harassment, unwarranted discipline, and discrimination.
  • Substantial increase of workload, such as an increase beyond the scope of the job description or an increase in deliverables that is impossible to meet.
  • Failure to accommodate, such as a refusal to implement return-to-work accommodations.
  • Unjustified suspension, such as when an employer puts the employee on an indefinite administrative suspension that is unreasonable or not in accordance with company procedures.
  • Temporary layoff, such as when a temporary layoff does not comply with the requirements found in minimum standards legislation (and in some jurisdictions, an employee’s contract must explicitly allow for temporary layoffs to help address short-term business needs).

How to determine constructive dismissal

The Supreme Court of Canada developed a test to determine whether constructive dismissal has occurred. This test has two different branches:

  1. The employer has unilaterally breached a term, whether express or implied, of the employment contract; and
  2. This breach substantially alters an essential term of the contract.

To determine whether a breach substantially altered an essential term, a court asks whether a reasonable person in the same situation as the employee would conclude that the employer’s conduct had resulted in a substantial change.

Under the second branch, there is only one step. Constructive dismissal occurs under the second branch if the employer’s conduct, taken as a whole, demonstrates that they do not intend to be bound by the employment contract.

Under either branch of the test, the primary burden is on the employee to establish constructive dismissal.

The first branch of this test is more common, and the guidelines below focus on situations of this type.

Best practices to avoid constructive dismissal claims

Avoid bad faith dismissals by:

  • Getting consent: Whenever you can, get consent from the employee before changing the terms and conditions of their employment. If the employee is amenable to the substantial change, write it into their employment contract as an addendum or ask them to sign a new agreement. To enforce a new agreement, provide fresh consideration: for example, consider offering the employee a one-time bonus for agreeing to the change.
  • Investigating complaints: Constructive dismissal also describes when employers neglect to investigate or address or when they ignore complaints of workplace harassment and bullying. Take complaints seriously, investigate them, and where substantiated, implement corrective actions to address the misconduct.
  • Assessing risks: Conduct a risk assessment to determine the significance of a change you want to make to the terms and conditions of employment, as well as how the change will affect the employee. An assessment will determine whether the risk of constructive dismissal is low or high.
  • Including provisions: If you expect that the employment relationship will at some point require a substantial change, create an employment contract that allows for change. Some provisions will not be considered valid by a court regardless of whether they are agreed to in an employment contract.
  • Providing written notice: The notice period must be as long as the employee’s notice of termination would be. Advise employees that, if they do not accept the change, the notice period applies as their notice of termination. Note that in some cases, fresh consideration over and above continued employment must still be provided when you give notice.

Support to avoid constructive dismissal claims

Get more expert tips to mitigate or eliminate the risk of constructive dismissal in our FREE guide. Consider the assistance of an employment lawyer before making a unilateral, fundamental change to the employment relationship. Our award-winning team of HR advisors can also support you with a range of functional areas, including termination. Whether you run a small nonprofit organization or are a leader in your industry, we have the expertise to solve your HR puzzles. Book a free demo with one of our experts and see how HRdownloads can help your organization’s HR goals.