What kind of notice is required?
Question: My company is looking at implementing a company-wide salary decrease as an alternate measure to mass layoffs. The decrease will be across the board and based on each employee's compensation level. The reason is based on a business need due to economic hardship. What is the legal way to provide employees with reasonable notice of change?
Answer: In light of economic conditions, it is not surprising I am encountering variations of this question frequently. Often, organizations tend to think only of downsizing and layoffs when seeking to cut costs. However, simply packaging a number of people out in order to cut labour costs may not be the right solution. In many cases, people are paid fairly substantial packages not to work, only to be rehired once the economy picks up and their services are needed once again. Often, it would have been less expensive for the company to simply keep those people employed during the economic downturn.
Recognizing this, and also recognizing most people would prefer to keep their job, even at a reduced salary, many organizations are seeking to implement changes to existing employment agreements rather than simply let people go. There are more creative solutions; however, they also come with costs and risks.
The most common changes contemplated are reductions in compensation or working hours. The latter can take the form of reduced work weeks, layoffs, unpaid days off, additional unpaid vacation, or unpaid sabbaticals. It is crucial, however, for employers to understand that when they propose to make such changes, they are, essentially, seeking to unilaterally change a contract. Many employers fail to realize they may not be legally entitled to do so. Sometimes, they go ahead and impose the changes, only to find themselves facing a constructive dismissal claim.
In assessing whether a change constitutes a constructive dismissal, courts will often look at the magnitude of the change. Relatively nominal changes, or changes to terms that are of relatively minor importance, will usually not constitute constructive dismissal. The question, of course, is how much is too much when it comes to change. Can you reduce someone’s salary by $25,000, or cut their commission from 10 per cent to 5 per cent? As is the case in many areas of law, there are no hard and fast rules in this regard.
The question asks about providing notice of the proposed change. In other words, the change would still be unilaterally imposed by the employer, but the employees would be given a notice period before the change takes effect. In the past, we would often advise employers to adopt this approach, with the amount of notice required paralleling the notice required in the event of an outright dismissal. However, the recent Ontario Court of Appeal decision in Wronko v. Western Inventory Service Inc. has created substantial uncertainty with respect to whether such notice will be effective. In that case, Wronko had an employment agreement which provided for a lump sum severance payment equivalent to two years’ salary. The company sought to change that agreement in order to have a less onerous termination provision and when Wronko refused, the company purported to give him two years notice of the change. The Court of Appeal found the company was not entitled to do so. As a result, employers are advised to be extremely cautious in adopting this approach, as it may result in liability.
Given the economic climate, in many cases the most effective way to proceed will be to reach an agreement with the employees. If the need for the proposed change is explained to them, they may well understand why it is necessary and agree to it in order to keep their jobs.
For more information see:
•Wronko v. Western Inventory Service Inc., 2008 CarswellOnt 2350 (Ont. C.A.).
