Employee accepted demotion

Benz Sewing Machines Ltd., a family owned business, operates as B&W Sewing Machine Co., selling and servicing industrial sewing machines in Ontario and Western Canada. In Quebec and the Maritimes it operated the same business through its subsidiary CRV.

When the company began to grow in the late 1980s, Lawrence Whittlen, the president and controlling shareholder, needed someone to take care of the administrative side of the business so that he could continue to concentrate on sales and customer relations.

To take care of the increasingly sophisticated financial side of the business, Eugene Kolaczynski was hired as the company’s controller. Toward the end of 1990, at Mr. Kolaczynski’s request, he was made vice-president and general manager of B&W. With this new position came an increase in salary from $40,000 to $100,000 as well as commission on the company’s sales.

Over the next eight years, Mr. Whittlen was pleased with Mr. Kolaczynski’s performance. This was evident by the regular salary increases that he enjoyed.

Late in 1995, Mr. Kolaczynski advised Mr. Whittlen that its subsidiary CRV was likely to have a bad year with a forecasted loss of $800,000. Mr. Whittlen asked Mr. Kolaczynski if he could “take it over and repair it.” Over the next year the situation in Montreal was left in the hands of Mr. Kolaczynski.

In 1996 he made frequent trips to Montreal to exercise his new responsibilities and periodically provided Mr. Whittlen with status reports on CRV. The reports indicated that “everything was under control.”

In September 1996 Mr. Whittlen learned from the employees of CRV in Montreal that the situation was not as Mr. Kolaczynski led him to believe. The morale of the employees was low and his dealers were upset. Mr. Whittlen realized that if he did not remove Mr. Kolaczynski from the Montreal operation, he would have a revolt on his hands.

In October 1996 Mr. Whittlen met with Mr. Kolaczynski and informed him that he would be taking over the Montreal operations of CRV. In addition, Mr. Kolaczynski was informed that he would no longer get commissions on company sales but would receive a bonus based upon profitability.

By the end of 1997 it was apparent that there were serious problems with B&W’s records of accounts payable and accounts receivable. The full extent of the problem was not realized until 1998 when Len Zuk, the company’s auditor, prepared a financial statement. At this time Mr. Whittlen learned that long-time suppliers were complaining that they were not paid while other suppliers were paid twice.

In January 1998 Mr. Whittlen and Mr. Kolaczynski met. Mr. Whittlen expressed his concern about the problems that had arisen in the office. Mr. Kolaczynski acknowledged that there were problems in areas of his responsibility, especially regarding the recording of inventory.

As a result of the problems Mr. Whittlen informed Mr. Kolaczynski that he would be taking over responsibility for office management and that Mr. Kolaczynski’s salary was being reduced by $35,000. His company car and credit cards (except a gasoline card) were also removed and replaced with a car allowance. He was informed that he would be paid a bonus of $25,000 if he got the new computer system installed successfully by June 30, 1998.

Mr. Kolaczynski understood that these changes were a demotion. However he continued to perform his newly limited duties at the newly reduced salary.

In June 1998 Mr. Whittlen’s son Daniel began working for B&W. He had just graduated from university with a degree in business administration. He joined the firm with no official title. Mr. Whittlen wanted him to have the opportunity to learn about the business.

On June 25, 1998, after meeting with Mr. Kolaczynski and the training officer for the new computer system, Daniel wrote a memo to Mr. Kolaczynski about the problems with the computer system. Mr. Kolaczynski was shocked and insulted by the memo. He met with Mr. Whittlen to discuss the bonus that he was to receive upon installation of the computer system.

Mr. Whittlen did not believe that the computer system was functioning satisfactorily and refused to pay the bonus of $25,000. He did offer to pay $5,000 at that time and the balance in installments of $5,000 as the system improved.

Shortly after this incident Mr. Kolaczynski took the position that he had been constructively dismissed and commenced an action against B&W.

The Court held that neither the memo from Daniel nor the decision on the computer bonus either alone or combined with other incidents amounted to constructive dismissal. However the events of January 1998 when there was a unilateral and dramatic change in remuneration, job description and perks clearly amounted to constructive dismissal.

The real issue was whether Mr. Kolaczynski had acquiesced to the constructive dismissal of January 1998. He accepted the car allowance, the salary and the task of completing the computer installation and continued to work for six months. However he did write a memo to Mr. Whittlen in March outlining his concerns about the demotion. Mr. Whittlen never addressed this memo because of intervening personal matters. The Court was satisfied that Mr. Kolaczynski did not consent to the change in job description and salary.

Having found constructive dismissal, the Court awarded damages in lieu of notice based on a notice period of 15 months. From that, six months were deducted for time worked.

For more information:

Kolaczynski v. Benz Sewing Machines Ltd., Ontario Superior Court of Justice, Docket No. 98-CV-155703, Mar. 22/02.

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