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Bad-faith demotion gives rise to significant damages

Employer's unilateral change substantially altered the essential terms and conditions of long-term worker's employment


April 3, 2020
By Daniel Gaspar/Sherrard Kuzz

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Constructive dismissal may arise when an employee who has not been expressly terminated claims the employer’s actions amount to a repudiation of the employment contract. If an employee has been constructively dismissed, the employee is entitled to pay in lieu of notice comparable to what would have been received if employment had been terminated without cause and, depending on the severity of the employer’s actions, the employee may also be entitled to aggravated damages.

As a recent Ontario Superior Court of Justice decision — McLean v. Dynacast Ltd., 2019 ONSC 7146 — illustrates, aggravated damages may arise when an employer fails to be candid, reasonable, honest and forthright with an employee.

What happened?

Christopher McLean had been employed as a unionized maintenance technician with Dynacast for close to 30 years when he was offered and accepted a promotion to the newly created non-unionized position of sales and service technician. He executed a written employment contract entitling him to a salary and sales-based commission.

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The contract provided that “any modification to this letter of appointment must be in writing and signed by the parties to it.”

It also contained a termination provision stating “if your employment is terminated without cause, by providing you with remuneration as in accordance with the Employment Standards Act”.

After almost seven years in the new role, McLean was offered a new position refurbishing, maintaining and repairing equipment on the plant floor.  Dynacast explained the position change was necessary as sales were down (which was not, in fact, the case).  While McLean’s salary would remain unchanged, he would no longer have sales duties or be entitled to commission.  Instead, he would be eligible for a bonus based on the amount of refurbishing work he completed.

McLean viewed the new position as a demotion from his existing position.

When he asked Dynacast what would happen if he declined the offer, he was advised he would be deemed to have resigned.

This is precisely what happened.  McLean declined the offer and was deemed to have resigned.  He alleged he was constructively dismissed and brought an action for wrongful dismissal.  At the time, McLean was 58 years old and had worked with Dynacast for close to 35 years.

The court finds constructive dismissal

The court held McLean had been constructively dismissed as the unilateral change introduced by Dynacast substantially altered the essential terms and conditions of McLean’s employment.  Specifically:

  • a significant portion of the new position involved work of the unionized bargaining unit
  • the new work would be on the plant floor and physically demanding; by contrast, his former role was an “office job” where he was able to dress in business casual attire and work in his own office
  • the lost commission historically increased McLean’s base compensation by approximately 10 per cent to 15 per cent a year; this could not be replaced by the proposed bonus target based on work completed

As for McLean’s entitlement to notice of termination or pay in lieu, the court held the termination language in the employment contract did not limit McLean’s entitlement to only the Ontario Employment Standards Act, 2000 (ESA) minimum. Accordingly, McLean was entitled to reasonable notice at common law, which would be significant in light of his age, position and length of service.  Generally, “exceptional circumstances” are required before a court will award more than 24 months of reasonable notice.  In this case, the court awarded 28 months on the basis of:

… the unilateral breach of the governing contract of employment, the radical reconfiguration of the job description, which in my view amounted to a demotion, the mistaken or misguided rationale proffered for the changes and the domineering attitude taken by the defendant through culminating in the unilateral imposition of the changes.

Finally, the court held that McLean’s decision not to mitigate by temporarily accepting the new position was reasonable because his return to the plant floor would have been humiliating and embarrassing.

Employer’s ‘bad faith’ warrants additional damages

In addition to 28 months of notice, the court awarded McLean $25,000 in aggravated/moral damages for bad faith in the manner of its termination. Specifically, the court found Dynacast:

  • was aware it could not unilaterally modify the terms of employment, but nonetheless insisted McLean accept the change in position or be deemed to have resigned
  • represented to McLean the change to his role was due to a decline in sales when this was “untruthful and misleading”
  • placed unreasonable pressure on McLean to accept the role or face a loss of employment without compensation

Tips for employers

  1. Be wary of “standard” contract terms. In this case, the employment contract restricted the employer’s ability to modify its terms without consent.  While standard in many commercial contracts, a non-modification clause in an employment contract can unduly restrict an employer’s ability to make changes and should be avoided.
  2. Include an enforceable termination provision in any employment contract. Had the language of the termination clause been properly drafted to restrict McLean’s entitlements on termination to only the minimum payments and entitlements under the ESA, he would have been entitled to only eight weeks of termination pay (and severance pay, if applicable), rather than the 112 weeks (28 months) awarded by the court.
  3. Do not deliberately mislead an employee about the reason for a change. An employer may fear a candid conversation about why a change is required may upset an employee if related to the employee’s own conduct or performance.  However, as this decision illustrates, a misleading or untruthful rationale may later be viewed as “bad faith” and give rise to additional damages.

Daniel Gaspar is an articling student with Sherrard Kuzz LLP, one of Canada’s leading employment and labour law firms, representing employers. To learn more and for assistance drafting and implementing employment contracts tailored to your workplace, contact the employment law experts at Sherrard Kuzz LLP.