Employee wins back unilateral pay cuts (Legal view)

By staying on the job, employee was mitigating his losses
By Daniel Lublin
|Canadian HR Reporter|Last Updated: 01/14/2011

With a new company president poised to reduce operating costs, Lorenzo Russo saw the writing on the wall. As the long-time warehouse manager at Toronto-based candy manufacturer Kerr Bros., Russo was paid more than $100,000, a salary considered excessive by his new boss.

Russo was a “lifer” at Kerr after 37 years at the company, so changing his salary was no easy task for company president Fayez Zakaria. However, Zakaria claimed pay cuts were needed to keep the company operating. He felt the salaries for all of the employees were more than what was competitive in the marketplace and certainly more than the company could afford. Therefore, in April 2009, he asked all employees to take a 10-per-cent pay cut and notified them the company pension plan would be dissolved.

After the first round of pay cuts, Zakaria determined additional changes were required. He singled out four employees, including Russo, he felt should have further reductions to their pay. Zakaria told Russo he must take a further pay cut amounting to almost one-half his previous salary. He also confirmed Russo’s annual bonus of $30,000 would not be paid in the future. When Russo refused, his salary was reduced anyway from $85,000 to $60,000.

Continued working after complaining of pay cut

When a pay cut is imposed by a company, employees typically think in terms of constructive dismissal, which permits them to reject the change by leaving and then suing for severance. If the pay cut is viewed by a court as substantial — usually defined as more than 10 per cent — then an employee will be treated as having been fired and entitled to severance.

Russo responded by retaining a lawyer who wrote to the company to complain. The lawyer confirmed Russo did not accept the change to his pay but, instead of leaving and arguing he had been constructively dismissed, he was going to stay at work and sue for the difference in pay. In doing so, Russo and his lawyer seem to have hit upon something big.

Kerr attempted to defeat Russo’s claim by arguing that, having stayed on with the company after the change to his pay, Russo had effectively condoned that change and could not be entitled to damages. However, Russo had made it clear he was not accepting the change and, by staying and continuing to work while he sued, he was simply trying to mitigate any losses he had suffered.

The Ontario Superior Court of Justice agreed with Russo and awarded him the difference in the pay he would have earned had his salary not been cut at all. Allowing Russo to remain and work, despite his protests, was actually the very evidence Russo needed to support his claim.

Tips for employers

What does this case mean for Canadian employers? From time to time, employers will have to impose changes, whether to compensation or otherwise, that employees will resist. While the changes can still be made, Russo v. Kerr Bros. Ltd., 2010 CarswellOnt 8373 (Ont. S.C.J.) demonstrates some of the difficulties and costs employers face by forging ahead with an incorrect approach.

If an employer plans to impose any real changes to an employee’s job, it should follow these steps:

• Seek consent to make significant changes to an employee’s job. It is not a constructive dismissal if an employee agrees to the changes, whether by continuing to work without protest or by indicating acceptance through words, conduct or in writing. This should be the first step for any company seeking to make amendments to an employee’s job.

• If the employee refuses to accept the change, notify her in writing the change will be made anyway, effective at a future point in time. The amount of notice of the change that must be provided is consistent with the amount of notice required to terminate the employee.

• Advise the employee, right from the start, that at the end of this notice period, she can continue to work under the new terms of the job or the notice period she has been provided with will be viewed as working notice of dismissal. Most employees faced with this scenario will quickly look for other work or reconsider their decision to reject the change to their job.

Daniel Lublin is an employment lawyer at Whitten & Lublin. His practice consists of counselling both employers and employees on the law of dismissal. He can be reached at dan@toronto-employmentlawyer.com.

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