Constructive lessons in dismissal

Does someone else’s promotion constitute constructive dismissal?


When Barbara Carnegie discovered in February 2001 that a colleague she regarded as an equal had been promoted and was now her boss, she didn’t take the news well.

Upset, Carnegie, the director of sales and service for Liberty Health, refused offers to move to another directorship that would avoid having her report to her newly promoted co-worker. Remaining in her job, she adamantly refused to answer to her new superior. Liberty Health declined to change the reporting structure. Carnegie quit and sued for constructive dismissal.

Carnegie’s success at trial — she won $20,000 — was quickly dashed in October 2003 when the Divisional Court of Ontario’s Superior Court of Justice ruled on Liberty Health’s appeal. The three-member court unanimously ruled that for a constructive dismissal claim to be made out, employers must be guilty of some objective conduct which unilaterally alters a fundamental term in the employment relationship.

Creating a new reporting relationship did not alter the essential terms of Carnegie’s position. She remained in the same job, exercising identical duties. “Where the impact upon an employee’s responsibilities is not fundamental, altered reporting will not result in a finding of constructive dismissal,” said Justice McRae in an oral judgment, dismissing Carnegie’s suit.

The concept of constructive dismissal

In 1997 the Supreme Court of Canada defined the concept of constructive dismissal in the case of Farber v Royal Trust Company. A regional manager, who earned a base salary of $48,800 and a total of $150,000 per year including commissions, was told his job was eliminated. He was offered a lesser managerial position in charge of one branch, a position he held eight years earlier, which had no guaranteed base income and where commissions might have fallen below those he earned as a regional manager.

On behalf of Canada’s highest court, Justice Gonthier ruled that an employer that unilaterally makes significant changes to an employee’s duties signals that it is repudiating the employment contract. Employees who resign in these circumstances are deemed to be fired or, more accurately, constructively dismissed. The test, said Gonthier, is whether a reasonable person in the place of the employee would have felt the essential terms of the employment contract were substantially altered.

Because Farber’s position was eliminated and the offer of a new job was effectively a demotion without a guarantee of base pay, the Supreme Court awarded Farber $150,000 — a year’s pay for the breach of his employment contract.

If hiring a new superior for Carnegie did not warrant an award for constructive dismissal, then neither does hiring a new subordinate, said Justice Echlin in Vanelli v Sobeys Capital Inc., a trial-level decision of Ontario’s Superior Court of Justice issued in November 2003.

Cataldo Vanelli spent a quarter century in the same grocery working as a production manager. But, Vanelli grew suspicious of the store’s new owners. Evidence at trial revealed that though his employers assured him he was in charge of a new employee hired to assist him in July 2001, Vanelli believed the newcomer was there to usurp his position.

The relationship with his employers grew more tense. Vanelli balked when asked to close the store occasionally. Eventually, Vanelli’s health deteriorated and he collected sickness benefits until March 2002. He never returned to work, but sued for constructive dismissal.

Hiring a subordinate for Vanelli was not a conspiracy to remove him, and therefore not a constructive dismissal, ruled Justice Echlin. “Having carefully reviewed the terms of Mr. Vanelli’s employment and the evidence before me, I was hard pressed to find any significant changes to Mr. Vanelli’s workplace status or the terms of his employment,” wrote Echlin, noting Vanelli’s title, wages, seniority and vacation entitlements remained unchanged.

Dismissing Vanelli’s case, the court sent a message to employers that hiring a new subordinate in good faith cannot be grounds for a claim of constructive dismissal. Recognizing the need of employers to make changes to a senior employee’s duties that do not fundamentally alter the employment relationship, Justice Echlin also rejected the argument that Vanelli had the right to refuse to close the store. (Vanelli is appealing the decision.)

To avoid facing expensive constructive dismissal lawsuits both employers and employees should have clearly written contracts of employment. This is particularly true in relationships with senior employees whose potential claim for damages can be several times their monthly or even yearly wages and bonuses.

First off, contracts should spell out which modifications in the employee’s duties will be considered a violation of contract. A director’s contract may state that she must report to the president, and that any change to this reporting relationship will be construed as a breach. Executives may demand guarantees that they will not move to worse positions in the corporate hierarchy after a restructuring or a takeover.

One area that employers and employees often forget to deal with in drafting contracts is location. How far can the corporate office move before the employment contract is breached? For some employees an extra 10 kilometres might cause them to quit. Others might follow work around the country. This should be clearly laid down in writing before any hiring.

What steps can employers take to make significant changes to a senior employee’s role? First, corporations can offer advanced notice, allowing the employee time to prepare or to seek work elsewhere. The length of this notice is equal to the employee’s entitlement to “reasonable notice” — the amount of wages, expressed as a period of weeks or months of salary, the employee would receive if she quit and successfully sued for constructive dismissal. Alternatively, corporations may simply offer some valuable consideration in exchange for accepting new employment terms. Contact legal counsel to assist in the calculation of these sums.

For more information see:

Carnegie v. Liberty Health, 2003 CarswellOnt 4004 (Ont. Div. Ct.)

Farber v. Royal Trust Co., 1996 CarswellQue 1158 (S.C.C.)

Vanelli v. Sobeys Capital Inc., 2003 CarswellOnt 4587 (Ont. S.C.J.)

This in depth look at constructive dismissal was provided by Jorge Talbott. He is an Ottawa employment lawyer and management consultant. He can be reached at [email protected] or at 1-888-eWorkLaw.

Tips for employers

Robert Summerhurst, a certified corporate coach in Ottawa, suggests organizations exercise creativity when changing the duties of senior employees. “Give the employees options,” said Summerhurst. “Even if the choices aren’t great, the employee will have some sense of control.”

“Communicating the change in a way that reaffirms the value of the employee to the organization is important,” said Robert W. Little, the Toronto lawyer who represented Liberty Health on the successful appeal of the Carnegie decision. “This allows employees to accept changes, even demotions, and retain their pride.”

Speak with employees and explain where the organization believes their strengths will best fit into the company’s new structure, suggested Summerhurst. For this to succeed, the organization must be sincere in its efforts to redirect the employees, and senior staff must be prepared to deal with the ego bruising that will result from change.

“Dealing with a loss of status is one of the most difficult things to work though,” said Summerhurst. “People aim their careers into the management ranks because of status, control, money, influence and prestige.” A negative change in any of these factors directly affects the reasons why senior employees perform their work.

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