Wednesday, July 1, 2015

Canada - Constructive Dismissal in Canada - Legal Construct Clarified by the Supreme Court of Canada

By Theodore Goloff, Senior Partner, Chair Labour and Employment Practice Group Robinson, Sheppard, Shapiro LLP, Montreal, Quebec

Dynamic is an apt description of labour and employment law in Canada, particularly bearing in mind how these areas have been reshaped by the Courts in the past decade. While its bijural system of private law – Anglo-Canadian common law in nine (9) provinces and a distinctive civil law tradition in Quebec - might be expected to result in disparate solutions to common human resource issues, the Supreme Court of Canada, whose judges represent both traditions, has sought to harmonize employment law principles throughout the country . Where it felt useful, it is also borrowed from arbitral precedent of the unionized sector of Canada’s Labour Force, where reliance on precedent from other legal traditions has been more frequent. A review of the Supreme Court’s recent decision in Potter vs. New Brunswick Legal Aid Services Commission , in which numerous employment law principles were canvassed, reviewed, modernized and harmonized is a seminal case in point. The fact that it arose in a common law environment did not deter Mr. Justice Wagner, from, in part, using a comparative law framework to expand common law precedent to harmonize outcomes with norms already present in Quebec Civil Law. What results is not only needed clarification in various areas of employment law but a judgement which works effectively within Canada’s bijural system while remaining true to the principles of each legal system individually.


If “at will” is the bedrock of the employment relationship in United States, nowhere in Canada can an employer terminate without cause/serious reason unless appropriate statutory and “common law” notice and/or severance is tendered . Furthermore, recognizing the central role that employment has is in defining our self worth and dignity as well as the relative bargaining weakness of “labour” vs. “management”, the concept of “constructive dismissal developed within the civil and common law traditions, as a response to unilateral and prejudicial conduct by the employer that, even unintentionally, makes continued employment untenable or substantially changes working conditions. While the Supreme Court in Farber vs. Royal Trust Co. set down a principled framework for analyzing when “constructive dismissal” could be said to have arisen and what recourses might be available to the employee in such circumstances, several issues remain unresolved. It is in this context that the Potter Case is of seminal importance.


Plaintiff was employed as the Commission’s Executive Director for a fixed term of seven years. When mid-way through the relationship soured the parties began to consider a “buyout”. Before resolution, Plaintiff left on sick leave. Just prior to his expected return to work the Commission’s lawyer advised that Plaintiff was not to return to work until further direction. Unbeknownst to Potter, the Commission simultaneously advised the Minister of Justice that unless the “buyout” would be settled at a stated date prior to Plaintiff’s next expected date of return, he should be terminated for cause . When, before conclusion of the sick leave, the Commission, by separate letter, suspended him indefinitely with pay and delegated all his duties and powers to another individual, Potter resigned under protest and sued, submitting that he had been “constructively dismissed” and claiming inter alia the balance of salary and benefits under the fixed term contract. He advised that he would be drawing down his pension without prejudice to his claim. Having lost in both trial and appellate Courts the matter came before the Supreme Court of Canada.


The Court dealt with and resolved multiple issues and in particular: a) clarified the tests identifying a constructive dismissal and the shifting burdens of proof and/or adducing evidence between the parties; b) determined the admissibility and/or relevancy of information unknown at the time of cessation of employment; c) dealt with the parameters that characterize an administrative “suspension”, in effect a form of “garden leave”; d) clarified the authority of an employer to withhold work under both the common law and civil law systems; e) recognized that “garden leave”, without legitimate business interest justification could be the catalyst for constructive dismissal; f) refined the rules regarding whether or not the drawing down pension benefits reduce the employer’s exposure to contractual damages.


When an employer’s conduct evinces an intention to no longer be bound by the employment contract, the employee has the choice of either accepting that conduct or those changes made by the employer, or treating the conduct or changes as a repudiation of the employment contract itself and proceed to sue for wrongful dismissal.

“Constructive” indicates that the dismissal is a legal construct even though the termination is brought about by the employee’s leaving.


On the one hand, a constructive dismissal could be said to arise when an expressed or implied contractual term is (i) identified (ii) has been breached and (iii) is sufficiently substantive to permit a reasonable conclusion that its breach means that the employer does not intend to be bound by the original contract. Typically the breach involves changes to the employee’s compensation, work assignments or place of work and must be both unilateral and substantive.

On the other hand, an employee can be found to have been constructively dismissed without identifying a specific term that has been breached “if the employer’s treatment of the employee made continued employment intolerable” .

The burden rests on the employee to establish that he has been constructively dismissed.


In the first type of “constructive dismissal”, the review must be done in two (2) stages. First the Court must determine objectively whether a unilateral change or breach, in fact, has occurred.

“If an expressed or an implied term gives the employer the authority to make the change or if the employee consents to or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach”.

To qualify as a breach the change must necessarily be detrimental to the employee in some way.


The two (2) steps of this analysis are distinct.

The first part is purely objective. The test is “whether at the time the breach occurred a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed”;

The ignorance of Plaintiff of the employer’s decision to terminate for cause unless a buyout ensued was, therefore, irrelevant. The evidence that was led was both pertinent and admissible. Its exclusion by the Trial judge was both error in law and certainly not “wholly harmless”.

It is at the second stage of the analysis that perspective shifts to “what was known by the employee at the time of the breach and what ought to have been foreseen by a reasonable person in the same situation”.

The shift in perspective demonstrates the balance struck in the doctrine of constructive dismissal, recognizing the vulnerability of the employee vis à vis the employer. The reference point in the second branch of the test is that of a reasonable person in the same circumstances as the employee, but based on reasonable perceptions that existed then.

There is no requirement that the employer actually intend to no longer be bound by the contract, the question being whether given the totality of the circumstances a reasonable person in the employee’s situation would have concluded that the employer’s conduct evinced an intention no longer to be bound by it.

On this portion of the test, for the majority, perspective cannot be stretched so far as to allow the employee to rely on grounds that although real were unknown to him or her at the relevant time.


Unlike Quebec Civil Law, there is, at common law, no pervasive legal obligation to provide work to an employee that does not, however, provide employers with unfettered discretion to withhold work “at will”.

The centrality of work as a fundamental aspect of one’s life, beyond providing a means of financial livelihood and support, as an essential component of one’s sense of identity, self-worth and emotional wellbeing means that the benefits of performing work are not limited to monetary or reputational benefits.

An employer cannot withhold work from an employee even while continuing payment of salary and benefits otherwise then for bona fide reasons relating to protecting a legitimate and identifiable business interest.

While some categories of employees may suffer proportionally more than others as a result of an employer’s decision to withhold work, giving rise to in the common law to an implied duty of providing work, employers do not have an unfettered right to put employees whose work does not provide them what are termed “reputational benefits” on “garden leave” without justifying such actions in terms of reasonable protection of a legitimate business interest.

To allow unfettered discretion would be inconsistent with the employer’s duty of good faith and fair dealing “gaining acceptance at common law”.

The notice sent by the Commission to the Minister of Justice could therefore be used by Potter on the first but not the second branch of the test. It could however be used as part of the evidence showing a broader male fides of the employer.


For the majority, above all else, it was “the indefinite duration of the “suspension”, its absence of candor in failing to provide Potter with any business rationale for it that demonstrated bad faith and amounted to substantial change to the essential terms of the contract that was imposed by the employer.”

An employer’s withholding of work, either in the form of “garden leave” or via a prohibition to attend the work place, both constitute a form of “suspension” which can be either disciplinary or administrative.

In most circumstances an administrative suspension renders it unjustified “… in the absence of a basic level of communication with the employee”, required by the overarching principle at Common Law that the Court had described the previous fall, drawing heavily from the civilian tradition in Quebec that “contractual dealings means being honest, reasonable, candid and forthright” .

Failing to provide an explanation for the suspension coupled with the letter to the Minister of Justice requiring termination for cause if settlement was not reached at a given date demonstrated that the employer was neither forthright nor candid.

While salary continuance is one factor that determines the legitimacy of any administrative suspension, in the face of its indefinite duration, the absence of any employer candor, the fact that the employer had already designated Potter’s replacement makes the suspension unauthorized. Since the employer failed to show it to be either reasonable or justified in the circumstances, save in circumstances where the suspension would have been exceptionally short, no employer could argue that it would be unreasonable to view its actions as “evincing an intention no longer to be bound by the contract”.

Because it viewed that there had thereby been already a constructive dismissal, the question of whether institution of the suit by him constituted his resignation and repudiation of the employment contract became moot.

Interestingly the Court recognized again that, as a derivative of the general duty to mitigate damages an employee could oppose a unilateral change to substantive working conditions by commencing legal action for constructive dismissal but without resigning where: (i) the employment relationship has not to become per se unsustainable and (ii) it was reasonable to remain in employment as a vehicle to mitigate damages.

In dealing with how the drawdown by Potter of pension benefits were to be dealt with, the Court applied IBM Canada Limited v. Waterman, and applied this so called “private insurance exception” to the general rule that “… contract damages should place the Plaintiff in the economic position that he or she would have been had the Defendant performed the contract” on the other hand “pension payments to which an employee has contributed and which were not intended to be an indemnity” for the type of loss that a breach of the employment contract engenders generally should not be deducted from the damages awarded in breach of contract.


Without discounting the importance of the suspension, the minority’s approach was not to focus on the prohibition to attend work as the catalyst, but rather to use broader. brush strokes holding that (i) as the Commission intended Potter’s termination come what may (ii) wanted him out of the workplace and “on the shelf” (iii) provided no assurance that it would honour all the terms of the contract until expiry, all of these evinced a clear and overarching intent not to be bound. The letter to the Minister was admissible, relevant and, indeed, determinate for all purposes because a non-breaching party claiming remediation (Potter) is entitled to rely upon any conduct, even unknown to him, that might with other elements demonstrate repudiative intention.


While the Farber Case may have arisen in a civil law environment the Supreme Court’s reference to similarities between Canada’s two legal systems as applied to “constructive dismissal” allowed the case to impact employment law throughout the country, in both common law and civil law provinces. No doubt, given the references of Mr. Justice Wagner to the principles of civil law, will allow the Potter Case although arising in a common law environment, to similarly impact employment law in Quebec. What is profoundly important is that the unifying force of a single bi-jural Supreme Court has not sacrificed one iota the purely of each system as it stands but has allowed each to grow and develop while harmonising and modernising employment law throughout the country.