Constructive dismissal – What is a “substantial” change to an essential term of the contract?

Nida Sohani of Gaertner Baron took a look at Constructive dismissal – What is a “substantial” change to an essential term of the contract? – and this is what she found:

Under the Employment Standards Act, termination of employment occurs when:

(a) the employer dismisses the employee or otherwise refuses or is unable to continue employing him or her;

(b) the employer constructively dismisses the employee and the employee resigns from his or her employment in response to that within a reasonable period; or

(c) the employer lays the employee off for a period longer than the period of a temporary lay-off.  2000, c. 41, s. 56 (1).

The Supreme Court of Canada in Potter v New Brunswick Legal Aid Commission, 2015 SCC 10 outlined two common forms of constructive dismissal:

  • a single unilateral act by the employer that breaches an essential term of an employee’s employment contract; or
  • a series of acts by the employer that, taken together, show the employer no longer intends to be bound by the employment contract.

Thus, the key question to ask when deciding whether an employee has been constructively dismissed is whether the employer has substantially changed an essential term of the employment contract. Some changes that can amount to a constructive dismissal include:

  • Reduction in compensation;
  • Demotion;
  • Change in reporting relationships;
  • Change in location of employment;
  • Change in hours of work;
  • Reduction in status and responsibilities; or,
  • Toxic or poisoned work environment constituting of bullying, harassment, or abuse.

Recent decisions from the Ontario Superior Court and Court of Appeal suggest that reduction in vacation pay or failure to pay a substantial bonus are minor breaches in nature and do not amount to constructive dismissal.

In Chapman v. GPM Investment Management, [2017] ONCA 227 (leave to appeal denied), the Ontario Court of Appeal held that an employer’s failure to pay a $329,687 bonus did not constitute constructive dismissal. The appellant worked for respondent, GPM, for nine years, as its chief executive officer and president. Over the course of his employment, the appellant entered into three successive memoranda of understanding, setting out the terms of his employment. The most recent of these was for a term of three years and was in force at the time the appellant’s employment ended. It stated:

This memorandum of understanding provided that the appellant was entitled, in addition to his base salary and various benefits and stock options, to an annual bonus that was to be calculated as follows:

Annual pro rata bonus available shall be 10% of pretax profit of GPMA and Darton less interest income and depreciation. Profit shall not include present level, if crystalized, of performance fees to GPMA on GPM/Endow (8) of $0.60MM.

The appellant later learned that GPM planned to exclude a $329,687 bonus earned as a result of sale of an investment land. The appellant left his employment taking the position that GPM’s refusal to include the bonus constituted constructive dismissal. GPM took the position that he had voluntarily resigned.

Although the trial judge found that GPM had breached the appellant’s contract by not including the profit from the land transaction in the calculation of the appellant’s bonus, he did not find that the appellant had been constructively dismissed. The trial judge found that that the appellant had breached the employment contract but that the breach did not alter an essential term of the appellant’s contract. He characterized the dispute between the parties as more a matter of “disagreement over the interpretation of the application of Mr. Chapman’s bonus scheme”. The Court of Appeal upheld the trial judge’s decision and stated that a “breach that is minor in nature, in that it does not substantially change an essential term of employment, does not amount to a constructive dismissal.”

In another recent decision, Lancia v Park Dentistry, 2018 ONSC 751,the Superior Court of Justice held that claw back of overpaid vacation pay, paid under the terms of an old employment contract while improper, did not amount to a constructive dismissal. The Court took into account that the plaintiff had not alleged constructive dismissal until over a year after she resigned, and had never communicated to the employer that she considered the repayment of her vacation pay as a breach of the contract. The court also considered that an employer’s failure to pay an employee a nominal amount – in this case, almost $3,000.00 – cannot be tantamount to a fundamental breach of contract justifying a claim of constructive dismissal.

These decisions question the principle that “it is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary.” (Martellacci v. CFC/INX Ltd., 1997 CanLII 12327 (ON SC).