Contracts can alter constructive dismissal

Appeal-court decision alters common-law definition

According to a recent decision of the Ontario Court of Appeal, written employment contracts can be used to significantly alter the common-law definition of constructive dismissal. Employers and employees can even include a clause in their agreements allowing the employer to significantly reduce the employee’s pay, as long as minimum notice is provided under the notice provisions of the Employment Standards Act. This decision approved a clause permitting a significant reduction in compensation.

In Magyarosi v. Berg Chilling Systems, O.S.C., Jan. 30, 2001, affirmed Sept. 20, 2002, Ontario C.A., Mr. Magyarosi had worked for the defendant, Berg Chilling Systems, for more than 22 years with only a short break in service. During his employment, there were changes to his responsibilities and compensation.

In 1996 Berg decided to make changes to Magyarosi’s compensation. The proposed changes included changing Magyarosi's compensation from the existing base salary and commission arrangement to a higher base salary and a lower commission level. The contract contained a provision allowing Berg to make changes to Magyarosi’s salary and commissions upon providing the minimum notice required under the Employment Standards Act. Magyarosi obtained some preliminary legal advice and proposed some requested changes to certain provisions of the contract. Ultimately he signed the agreement.

About three years later Berg proposed a new compensation package in which Magyarosi’s base salary would be reduced and his commissions would be increased, marginally, on certain types of accounts. Magyarosi did not accept the new package and Berg sought to impose it as permitted by the employment agreement. Magyarosi resigned and sued Berg for constructive dismissal.

At trial the court found that under the new compensation package, Magyarosi’s overall compensation would have been reduced by about 25 per cent. The trial court noted this would have been a constructive dismissal. However, in this case, there was an employment agreement which allowed for changes to salary and commissions in accordance with the notice under the Employment Standards Act.

Berg had provided Magyarosi with more than eight weeks of notice, which was consistent with the employment agreement and the minimum notice requirements under the act. The court held that since the employment contract contemplated a reduction in pay with a certain amount of notice, and Berg had met that notice requirement, there was not a constructive dismissal. The appeal court agreed that there was no constructive dismissal of Magyarosi since the reduction in compensation was contemplated by the employment contract that he had signed.

The appeal court only issued a short endorsement and did not provide a detailed discussion of the issues raised in this case. Based on the court's conclusion, Berg could theoretically have reduced Magyarosi's pay to almost nothing and still avoided a claim for constructive dismissal by arguing that this was contemplated by the contract.

The appeal court did not consider how this can be reconciled with HOJ v. Machtinger. In HOJ, a decision of the Supreme Court of Canada, the court had held that any notice provision which provides for a notice period less than that required by the Employment Standards Act is void. In Magyarosi, Berg was able to use the “change” clause to lower Magyarosi's pay by providing the minimum notice required by the act. However, Magyarosi was not entitled to compensation for the severance pay he would have been entitled to if he had been fired instead of having his pay reduced.

The appeal court briefly stated that it did not hear any evidence to suggest that Berg was using this clause in an attempt to terminate Magyarosi’s employment without providing him with appropriate notice.

As a result of the appeal court decision, employers may wish to include such clauses in their employment agreements. They will then be able to reduce their employees’ compensation quite significantly by providing only the notice required under section 57 of the act and without the obligation of providing severance pay.

It should be noted that there are some unique facts in Magyarosi that might distinguish this case from others, including the nature of the discussions between the parties leading to the signing of the employment contract. Magyarosi did not come across as a vulnerable employee who was presented with a standard form agreement and had no alternative but to sign it. He had obtained at least some preliminary legal advice and had been told specifically not to sign the agreement.

Nevertheless, Magyarosi may be used more widely to suggest that employers and employees can very clearly change common-law definitions of constructive dismissal in written employment contracts. Employers preparing employment contracts may well wish to include a variety of possible changes to allow the maximum flexibility in their dealings with their employees.

Howard Levitt, author of The Law of Dismissal in Canada, and The Quick Reference to Employment Law, and Ken Krupat, are employment law lawyers at Lang Michener in Toronto. They both edit the Dismissal & Employment Law Digest, and can be reached at (416) 360-8600.

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