Changing vacation entitlement

Question: If a company implements a change in how additional vacation time is earned, does it need to formally notify the employees it immediately affects or can it make a general announcement to everyone? Are there any legal considerations for such a change?

Answer: When an employer unilaterally changes an employee’s employment contract or applicable policies, it should always consider the doctrine of constructive dismissal. Constructive dismissal occurs when an employer indicates an intention to no longer be bound by the employment contract by fundamentally changing its terms. An employee who successfully claims constructive dismissal is entitled to damages in lieu of reasonable notice of termination, subject to their duty to mitigate.

In Potter v. New Brunswick (Legal Aid Services Commission), the Supreme Court of Canada affirmed the following two-staged test that an employee must make out in order to establish a claim in constructive dismissal:

1. Has there been a breach to the employment contract, and if so, did the breach substantially alter an essential term of the contract?

2. Would a reasonable person in the same situation as the employee consider that the essential term of the employment contract be substantially altered?

If an employee were to allege constructive dismissal on the basis of a minor change in vacation entitlement, it is unlikely that the employee would be able to satisfy either stage of the above test. Since vacation is a small portion of an employee’s total remuneration and benefits, it is unlikely that a change to vacation entitlement would, on its own, amount to a “substantial alteration” of his or her terms and conditions of employment.

What amounts to a “substantial alteration” is a fact driven exercise, but generally courts have found that a compensation reduction of less than 10 per cent of the total remuneration package does not amount to a constructive dismissal claim, whereas a compensation reduction of more than 20 per cent of the total remuneration package does.

For example, in Hamilton & Olsen Surveys Ltd. v. Otto, the employer, during an economic downturn, unilaterally changed two employees’ vacation entitlement from six weeks to four and suspended its matching RRSP savings plan. The ultimate effect was to reduce the employees’ annual compensation by 6.5 and eight per cent, respectively, but keep the employees’ annual salary intact. The Alberta Court of Appeal found that these were relatively minor changes and did not indicate that the employer did not otherwise intend to be bound by the terms of the employment contract. As such, the employee’s claim for constructive dismissal was dismissed. However, if a change to vacation entitlement is coupled with other changes in remuneration or employment responsibilities and duties, the net changes may collectively establish a constructive dismissal: see Zitten v. Sadie Moranis Realty Corp.; Benoit v. Canadian Corps of Commissionaires (Southern Alberta); Borasto v. Atwater Insurance Agency Ltd.

Employers may avoid the risk of a constructive dismissal claim in instances such as amending a vacation policy, by giving employees some notice of the pending changes. For policy changes that result in a minor effect to an employee’s total remuneration package, only a minimal amount of notice is required. However, to determine the appropriate notice period, both the existing vacation policy and the employee’s employment contracts would need to be reviewed as a preliminary step to determine if a notice period is specified. Finally, with company-wide policy changes that have a minimal effect on the working force, there is no issue in making a ‘group’ announcement, so long as affected employees are provided with a company contact that can answer questions if an employee has a concern.

For more information see:

• Potter v. New Brunswick (Legal Aid Services Commission), 2015 CarswellNB 87 (S.C.C.).

• Hamilton & Olsen Surveys Ltd. v. Otto, 1993 CarswellAlta 108 (Alta. C.A.).

• Zitten v. Sadie Moranis Realty Corp., 2015 CarswellOnt 19639 (Ont. S.C.J.).

• Benoit v. Canadian Corps of Commissionaires (Southern Alberta), 2011 CarswellAlta 2402 (Alta. Prov. Ct.).

• Borsato v. Atwater Insurance Agency Ltd., 2008 CarswellBC 1144 (B.C. S.C.).