CONSTRUCTIVE DISMISSAL AND THE DUTY TO MITIGATE

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1 CONSTRUCTIVE DISMISSAL AND THE DUTY TO MITIGATE In 1997, in a case called Farber v. Royal Trust Co. 1, the Supreme Court of Canada discussed the nature of constructive dismissal in Canada and the rights that flow when a constructive dismissal exists. In this paper I will examine briefly the comments of the Court in Farber and a number of recent decisions which have since been handed down by our Courts. In each case, I will discuss both the kinds of facts which the Courts have said will constitute a constructive dismissal and the nature of an employee s obligations to mitigate his or her damages if a constructive dismissal exists. I will conclude with a list of suggestions that may assist employers to effectively deal with situations that might lead to constructive dismissal claims. FARBER V. ROYAL TRUST CO. Mr. Farber began working for the Royal Trust Co. in November 1966 as a real estate agent. Farber was promoted a number of times over the years. In 1982, he became Regional Manager for Western Quebec, a position which required him to supervise and administer 21 offices employing some 400 real estate agents and 35 secretaries. In 1983, Farber s region generated more than $16,000,000 as a result of which his remuneration, made up of $48,000 in guaranteed base salary and the balance in commissions and benefits, was $150,000 for that year. In June 1984, Royal Trust, as part of a major restructuring, decided to eliminate 11 of the 12 regional manager positions across the country, including Farber s. As compensation, Royal Trust offered Farber financial compensation and a manager s position at the Dollard branch, a position he had held eight years earlier. The financial compensation being offered included $40,000 as a reorientation allowance payable within 2 years. His income would become 100% commission; Farber was not offered any guaranteed base salary as a manager of the branch. Farber was aware that the Dollard branch was one of the most problematic and least profitable in the province. He considered Royal Trust s offer unacceptable and initiated discussions with the company to see whether he could be appointed manager of a more profitable branch or obtain a guaranteed base salary 1 [1997] 1 S.C.R. 846

2 for the following three years. Based on the available information, he believed that his remuneration would be cut in half. Royal Trust told Farber to assume his new duties or it would consider that he had resigned. Farber did not go to the Dollard branch on the required date and sued Royal Trust for damages on the grounds that he had been constructively dismissed. Evidence at trial indicated that the Dollard branch sales increased significantly after Farber left and that Farber s earnings would not in fact have dropped. The Supreme Court of Canada held that where an employer decides 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 the job, the employee has not resigned, but has been constructively dismissed. In order to determine if the unilateral changes imposed by the employer substantially alter the essential terms of the employee s contract, a 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 had been substantially changed. The change from a base salary plus commission to remuneration based totally on commissions was significant. Farber acted reasonably based on information available at the time. The Court held that Royal Trust had constructively dismissed Farber. Farber was therefore entitled to compensation in lieu of notice. Since the purpose of remuneration in lieu of notice is primarily compensatory, it must be fair and reasonable in light of all the circumstances and being based on the value of the former employee s previous remuneration. The Court awarded Farber $150,000 as one year s remuneration in lieu of notice. The subject of mitigation was not dealt with by the Court because Royal Trust did not raise mitigation as a defence until it was presenting its argument before the Supreme Court of Canada. The Court refused to consider the argument at that late date. EMPLOYEE S OBLIGATION TO MITIGATE THE LAW IN ONTARIO Ever since the decision of the Ontario Court of Appeal in Mifsud v. MacMillan Bathhurst Inc. 2, the law in Ontario has been fairly clear regarding the potential obligations of an employee, who claims to have been constructively dismissed, to accept the new position being offered by his or her employer in order to properly mitigate. The Courts have generally said that where the salary offered is the same, where the working conditions are not substantially different or the work demeaning, and where the personal relationships involved are not 2 (1989), 70 O.R. (2 d ) 701

3 acrimonious, it is reasonable to expect the employee to accept the position offered in mitigation of damages during a reasonable notice period, or until he or she finds employment elsewhere 3. If the Supreme Court of Canada had adopted this test, it does seem unlikely that Royal Trust could have succeeded with a claim that Mr. Farber failed to mitigate his damages. POOR MANAGEMENT PRACTICES CAN CONSTITUTE CONSTRUCTIVE DISMISSAL In October of 1998, an Ontario Court found that the employee in Shah v. Xerox Canada Ltd. 4 had been constructively dismissed. In this case, the events leading up to the constructive dismissal did not involve any pay reduction or change in responsibilities. Instead, Mr. Shah had been provided with a warning letter by his supervisor, which had badly shaken him at a time when he was dealing with personal problems at home caused by his wife s miscarriage. He asked for both a transfer and some time off without pay, both of which requests were denied. Instead, he was given a second letter. Mr. Shah was so distressed at the treatment to which he had been subjected by management that he resigned. Until he encountered these difficulties, he had enjoyed a thirteen-year, positive working relationship with Xerox. The Court found that Mr. Shah s supervisor had conducted himself inefficiently and unreasonably and that Mr. Shah s resignation was a direct result of that conduct. The Court acknowledged the Supreme Court of Canada s decision in Farber v. Royal Trust and noted that in constructive dismissal cases, it is necessary to identify a particular fundamental term of the employment relationship that has been breached. Regarding the conduct of management in this case, the Court had this to say: Where the conduct of management personnel is calculated to cause an employee to withdraw from the employment, it may, in my judgment, amount to constructive dismissal. The test, I believe, is objective: it is whether the conduct of the manager was such that a reasonable person in the circumstances should not be expected to persevere in the employment. 3 Ibid, p [1998] O.J. 4349

4 As the particular circumstances are crucial, each case must be decided on its own facts. The test should not be lightly applied. An employer is entitled to be critical of the unsatisfactory work of its employees and, in general, to take such measures - disciplinary or otherwise - as it believes to be appropriate to remedy the situation. There is, however, a limit. If the employer's conduct in the particular circumstances passes so far beyond the bounds of reasonableness that the employee reasonably finds continued employment to be intolerable, there will, in my view, be constructive dismissal whether or not the employee purports to resign. On the issue of mitigation in this case, the Court was satisfied that Mr. Shah had made reasonable efforts to mitigate, but noted that he was hampered in his ability to do so because of his specialized knowledge and the relative lack of competition in his field. GOLDEN PARACHUTE SUPPORTS CONSTRUCTIVE DISMISSAL FINDING The Ontario Court of Appeal last year considered the principles enunciated by the Supreme Court of Canada in Farber v. Royal Trust in its decision in Reynolds v. Innopac Inc. 5 Mr. Reynolds was the Vice President of Human Resources. When he was hired, he entered into a parachute agreement which provided that, in the event of a takeover by his employer and if he were dismissed without cause within two years of takeover, he would be entitled to a payment equal to two years salary without any setoff for income he might be able to earn following his dismissal. In fact, a takeover occurred. Mr. Reynolds was not dismissed right away; he was instead asked to relocate to Vancouver from the City of Mississauga. He asked for a substantial relocation subsidy, a salary increase, a one-time bonus and a house decorating allowance, but his employer refused his overtures and offered instead only a modest decoration allowance. Mr. Reynolds took the position that his negotiations represented a reasonable effort to negotiate the loss of his golden parachute and ultimately refused the transfer to Vancouver. He secured a new comparable position almost immediately in Ontario. The Court of Appeal did note that had the only change in Mr. Reynolds position been the required move to Vancouver, his case might not have been decided as favourably to him. The Court was, however, satisfied that a move to Vancouver was a significant change for Mr. Reynolds and his family and did not expressly decide whether that would have been enough in itself to constitute a constructive dismissal. The move, in addition to the the nature of the job that he was to perform in Vancouver, longer hours of work, 5 (1998), 37 O.R. (3 d ) 577

5 more travel, the significant changes to the whole corporate management structure of Innopac following the takeover, the loss of the support of his Ontario colleagues and the loss of the protection of his golden parachute clause were together sufficient to constitute a constructive dismissal. The Court held that Mr. Reynolds was entitled to payment in accordance with the terms of his parachute agreement. The parachute clause provided as follows: In the event that a Take-over (as hereinafter defined) occurs with respect to the common shares of Innopac then where the Employee is dismissed by Innopac from his position with Innopac for other than Cause (as hereinafter defined) within two years of such Take-over, Innopac shall pay to the Employee two years Salary (as hereinafter defined) in lieu of notice or other compensation to which the Employee may otherwise be entitled and the Employee shall be under no obligation to act to mitigate any payment due under this paragraph or otherwise to suffer a reduction of any payment due to the Employee under this paragraph by virtue of any compensation which the Employee may receive after termination. For purposes of this paragraph 1 and for great certainty dismissal shall include constructive dismissal. NOTICE PERIOD MAY RUN FROM DATE OF DEPARTURE AND NOT FROM DATE OF CHANGE An Ottawa Judge recently held that the notice period in a constructive dismissal case started to run not from the date of the changes imposed by the employer but instead from the date that the employee left 6. There was a five and one-half month difference. Ms. Layne was moved from a position as Customer Service Representative to that of a Telemarketing Representative with a significant reduction in potential earnings. Ms. Layne delayed her departure because she did not want to jeopardize her ability to recover outstanding commissions that she felt were owing to her. Her employer took the position that she had in fact accepted the changes imposed on her when she did not leave right away. The Court was satisfied on the facts that Ms. Layne had not in fact accepted the changes and was also prepared to run the four-month notice period that she should have received from the date of her departure, 6 Layne v. Computer Associates International Inc. (1997), 32 C.C.E.L. (2 d ) 80

6 relying on an earlier decision 7 to the same effect. The plaintiff in that case had worked following the changes for a period of almost four months and decided to leave only when he felt his situation was beyond repair. EMPLOYER S REQUIREMENT THAT EMPLOYEE ACCEPT UNCONDITIONALLY ELIMINATED MITIGATION DEFENCE The employee in another Ontario case 8 had what he described to be the best job in Canada. His duties included managing about 100 employees. His salary was $200, and his bonus in his final year of employment was $1.4 million. He had nine years service. He successfully argued that he was constructively dismissed after the Bank hired another executive to assume several of his duties and after the Bank refused to confirm that he would receive a bonus at his previous level. Although his title never changed, the Court found that Mr. Schumacher lost a significant portion of his duties and that his job description and likely bonus entitlement had changed. The Court awarded him 13 months pay in lieu of notice, amounting to $1.73 million, based on his salary, expected bonus and stock options. A defence based on mitigation was not available to the Bank. In its dealings with Mr. Schumacher, it had made itself clear that he must accept the new position unconditionally or he could not return to the workplace. The option of working out the notice period while he looked for other work in mitigation of his damages was not available to Mr. Schumacher. The Court stated: Accordingly, this is a case where Schumacher s only mitigation option was to explore possibilities outside the Bank. He did so. Mr. Harrison takes no issue with the reasonableness of those efforts. I find that Schumacher fulfilled his obligation to act reasonably in mitigation of his damages. THE BURDEN IS ON THE EMPLOYER TO ESTABLISH A FAILURE TO MITIGATE Another recent Ontario decision which followed Farber v. Royal Trust and discussed the obligation to mitigate is Wadden v. Dare Foods Ltd. 9 The plaintiff was 47 years old and was told that his position as District Sales Manager would be eliminated in a reorganization. He had been employed for ten and one- 7 Wallace v. Toronto-Dominion Bank (1981), 39 O.R. (2 d ) Schumacher v. Toronto-Dominion Bank (1997), 29 C.C.E.L. (2 d ) 96 9 (1997), 33 C.C.E.L. (2 d ) 71 (Ont.)

7 half years. He was offered a position as a Sales Representative with a reduction in his base salary of $14, He was told that he might be able to make up that reduction in increased commissions, if he worked hard. Mr. Wadden refused the Sales Representative position and left the company. He found new employment at a reduced income about eight months after his dismissal. The Court held that he was constructively dismissed and that given the serious reduction in his remuneration, he acted reasonably when he refused the Sales Representative position and did not fail to mitigate. The Court found that the reasonable notice period in this case was twelve months and awarded Mr. Wadden compensation based on his lost remuneration for the entire twelve-month period, including his commission income, using a two-year average. He was entitled to be awarded the value of the personal benefit he received from the use of the company car and the employer contributions to his benefit plans for the notice period until he obtained his new employment. His former employer was given credit for the value of his earnings during the notice period with his new employer. In its decision, the Court did not accept the employer s argument that Mr. Wadden should have taken the initiative to discuss alternatives to leaving with his employer. For example, it was suggested that he should have discussed taking the new position part-time while he looked for work. With respect to this argument, the Court commented as follows: Given the serious reduction in remuneration here, the plaintiff did not act unreasonably in refusing the Sales Representative position offered. The employer had suggested that the plaintiff could and should have entered into negotiations with the employer about alternatives to leaving for example, by offering to take the new position, perhaps part-time, while he looked for new work. Reference was made to the fact that another employee made a suggestion that he might stay on while he looked for work, if given time off and salary protection, which was accepted. The employer indicated that it would have been favourable to discussions with the plaintiff along the same lines. This argument misconceives the parties respective obligations at the time of the constructive dismissal with respect to mitigation. It was the employer who changed the employee s terms and conditions of employment in such a manner as to constitute constructive dismissal. Whether there were other options for the employee at the company than acceptance of the demotion was a matter for the employer to present, for cases such as Red Deer College v. Michaels (1975), 57 D.L.R. (3 d ) 386

8 (S.C.C.) make it clear that the burden is on the defendant to show that the plaintiff could have reasonable avoided some part of the loss. 10 TEMPORARY LAY-OFF UNDER THE ESA MAY BE A CONSTRUCTIVE DISMISSAL One of the most interesting decisions in the constructive dismissal area recently has been that of the Court of Appeal in a case called Stolze v. Addario 11 Mr. Stolze had been a full-time salaried employee of Delcan for 32 years. His salary was expressed to be an annual one. He was referred to by the company as a "key" employee and as such was eligible for a bonus, in addition to salary. There was no evidence of any company policy respecting lay-offs of salaried employees at his level throughout the entire term of his employment. Mr. Stolze was "temporarily laid off" without notice or pay in lieu of notice pursuant to the Employment Standards Act. He believed that his employment had effectively been terminated by his employer and he brought a claim under the Employment Standards Act for the statutory termination and severance pay that he claimed were owing to him. After he received his lay-off notice, Mr. Stolze "quit" his employment by way of a letter from his lawyer stating that he would never work for Delcan again. Both the adjudicator appointed under the Act and the Divisional Court held that Mr. Stolze was not entitled to any payments. However, the Court of Appeal found that Delcan was not entitled, based on the contract of employment, to lay Mr. Stolze off, either temporarily or indefinitely. The Court found that the history of Mr. Stolze's relationship with his employer gave rise to obvious implied terms of employment, a breach of which could constitute constructive dismissal. There was nothing in the relationship between the parties that entitled Delcan to lay Mr. Stolze off and when it did so, it therefore constructively dismissed him entitling him to the termination and severance pay owing under the Act. The Court's ruling might have been otherwise had it been understood by contract, policy or practice that the right of lay-off was a term of the employment relationship. 10 Ibid, paragraphs 10 and (1997), 36 O.R. (3 d) 323 (C.A.)

9 Unless an employer can point to an express or implied term, binding the employee, in its relationship with the employee allowing the employer to exercise rights of temporary lay-off, it seems that no employer is likely to have much success attempting to rely on temporary lay-off provisions in employment standards legislation to deal with full-time, salaried employees. It is difficult to imagine when the temporary lay-off of such an employee would not be held to be a constructive dismissal.

10 SOME PRACTICAL SUGGESTIONS A Court is more likely to find that an employee is obliged to accept the new position being offered, if only in mitigation of damages, while he or she looks for work, if the new role is not demeaning, personal relationships are good and the compensation is the same. The employee should be offered the option of working in the new position while looking for work if he or she has formed the opinion that there is a constructive dismissal. If the above criteria are not being met, an employer seeking to avoid litigation should consider offering the employee a choice between the new position and a fair severance package.