Changing contracts tricky, but possible

Employers are free to make significant changes to the terms of employment contracts as long as enough notice is given

Employers who want to bring existing employment agreements in line with updated corporate standards often face a delicate challenge, particularly when proposed amendments will fundamentally alter contractual guarantees of significant value to employees. When an employer imposes these types of changes, it runs the risk the employee will resign and sue for constructive dismissal. The resulting litigation can be time-consuming, distracting and costly, especially when the employer is found liable for the former employee’s damages.

Employers can take guidance, however, from the recent decision in Wronko v. Western Inventory Service Ltd., where the Ontario Superior Court of Justice ruled a senior executive who received two years’ notice of a change to his contractual severance guarantee was not entitled to damages for constructive dismissal when the change took effect. In its decision, the court confirmed the long-standing but often ignored principle that employers may make unilateral and fundamental changes to existing employment agreements by providing employees with reasonable notice of the change.

Wronko concerned an employee, Darrell Wronko, who had worked for Western Inventory in Toronto for 16 years. Through various promotions, he rose to the position of vice-president of national accounts and marketing. With each promotion, he entered into a sophisticated employment contract that set out his severance entitlement. The termination provision of his last agreement guaranteed him the previous two years’ salary and bonus if notice of termination was given. It replaced a prior and less beneficial termination provision of two weeks’ notice for each year of service, to a maximum of 20 weeks.

Shortly after the appointment of a new president, Wronko was presented with a revised employment agreement that eliminated the latest termination package, replaced it with the language of the prior contract, and capped notice at 30 weeks. Wronko’s severance entitlement was reduced substantially, as the new president intended to bring his severance entitlement in line with what had been guaranteed to other senior executives. As matters stood prior to the amendment, Wronko’s entitlement was substantially greater than that of his peers.

After seeking legal advice, Wronko refused to sign the amended agreement and sent a letter to the president explaining why he could not agree to the requested change. Instead of responding to Wronko’s concerns, the president sent an unsigned letter giving two years’ notice the severance clause would be altered. Several months later, Wronko wrote to the president and stated: “this change is proposed without my agreement and without any consideration offered for the substantial reduction in my severance entitlement, and is therefore not acceptable to me.”

Once again, the president did not respond to Wronko’s objection. Instead, during subsequent meetings with Wronko, the president reiterated the company’s position. Shortly after the expiry of the two-year notice period, the president informed Wronko by e-mail the terms of the amended employment agreement were in “full force and effect.” The president also advised Wronko if he did not wish to accept the new terms and conditions of employment as outlined, there would be no job for him. Wronko understood this comment to mean his employment had been terminated, and asked if he should come in to the office to assist in an orderly transition. The president subsequently revised the company’s position and asserted only that Wronko’s employment agreement remained in place with the amended termination provisions.

Wronko requested clarification of what the president meant by “we do not have a job for you,” but wasn’t given any. Consequently, he assumed he had been terminated and asked for a severance package of two years’ salary, in accordance with the original agreement. The company refused this request, and Wronko brought an action for constructive dismissal.

At trial, the court accepted “a constructive dismissal occurs when an employer makes a unilateral and fundamental change to a term or condition of an employment contract without providing reasonable notice of that change to the employee.” The court observed there was no dispute among the parties that the change the company unilaterally sought to impose upon him was fundamental. Nevertheless, the court held it was Wronko, not the company, who had ended the employment relationship when the amendment came into effect. The company had provided two years’ notice of the change and Wronko chose to resign instead of accepting the new severance clause. Wronko had clearly been provided reasonable notice of the amendment to his severance entitlement and had not, therefore, been constructively dismissed. On this basis, the court dismissed the claim of constructive dismissal.

The decision in Wronko provides some comfort to employers who wish to make significant changes to existing employment agreements. It confirms that, to the extent employers want to alter such agreements, they may do so unilaterally by providing reasonable notice to affected employees.

Although employers may not avoid litigation by providing reasonable notice of a change, Wronko demonstrates reasonable notice will shield them from a finding of liability. In this regard, employers should seek legal advice to determine what length of notice would be reasonable in particular circumstances. Employers should also keep in mind changes to existing contracts of employment can be made more quickly if the affected employee agrees to the change and is provided with some form of consideration when the change is made.

For more information see:

Wronko v. Western Inventory Service Ltd., 2006 CarswellOnt 6170 (Ont. S.C.J.).

Rich Appiah is an associate with Israel Foulon LLP, an employment and labour firm in Toronto. He can be reached at (416) 604-1550 or [email protected]

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