Employers cannot use the pandemic as reason to justify imposing substantial changes on employees.
Have you been hit hard by the COVID-19 pandemic? Did you impose a substantial pay cut due to the impact of the pandemic on your business, or are you considering doing so? Well, you should think again.
In Kosteckyj v Paramount Resources Ltd, the Alberta Court of Queen's Bench found that a 47-year-old senior integrity engineer with six-and-a-half years of service and no direct reports was constructively dismissed when the employer imposed a 16- to 20-per-cent pay cut. The employer was liable to pay nine months of pay in lieu of notice.
Notably, the pay cut was a result of the employer's companywide cost reduction program due to the pandemic, and the employee had not taken any steps to accept or reject the changes. Her employment was then terminated 25 days after the change in compensation was implemented.
Why was this constructive dismissal?
A constructive dismissal occurs when an employer makes a unilateral and substantial change to a fundamental term of the employment contract. Compensation is generally viewed as a key term of the employment contract. Here, the court found that the employer unilaterally and substantially changed the employment contract when it implemented the cost reduction program without seeking the employee's consent.
The court stated:
"There was no expressed or implied term in the employment contract giving Paramount the authority to make such a unilateral change…
“[Olga] Kosteckyj was terminated 25 days after the announcement of the Cost Reduction Program. There is no obligation on an employee to advise an employer of the employee’s position on constructive dismissal before termination... the employee might not know that they are going to be terminated after an act of constructive dismissal.
“If constructively dismissed, the employee has the choice of either accepting the constructive dismissal or treating the changes as a repudiation of the contract by the employer and suing for wrongful dismissal... in the turbulent economic conditions... I do not find that Ms. Kosteckyj had an obligation to decide on whether the Cost Reduction Program constituted a repudiation of her employment contract within that 25-day period before her termination."
In addition, the court signaled that when assessing an employee's efforts to mitigate their damages by seeking new work, it is appropriate to consider the impact of the COVID-19 pandemic on the job opportunities.
As an aside, the court commented that the employer had improperly included settlement discussions in its pleadings. Where an employer provides an offer that is subject to a signed release from the employee, the fact that the employee declined that offer is irrelevant to an assessment of the merits of the case and cannot be referenced in the pleadings. It is only relevant when assessing costs.
What can employers do to minimize the risk of liability?
The COVID-19 pandemic may be a factor to consider in assessing an employee's entitlement to reasonable notice upon termination and the employee's obligation to mitigate their damages. However, an employer cannot use the pandemic as a reason to justify imposing substantial changes on its employees.
Even if you are in a dire financial situation, you must assess whether or not you have the right to impose such changes. For example, is there an implied or explicit right in the contract allowing you to do so? If there is no such right, then an employer should seek and obtain consent from an employee prior to implementing any substantial changes.
Case law indicates that a 20-per-cent pay cut is very likely to amount to a substantial change, and this decision signals even a 16-per-cent pay cut may be sufficient regardless of the impact of the COVID-19 pandemic causing company-wide cost reductions.
So, what happens if the employee does not agree? It will be strategic in some cases to give advance notice of the proposed change. Doing so can reduce the employer’s potential liability, since this notice can effectively count as notice of termination.
The notice should clearly state that if the employee rejects the new terms, their employment will terminate at the end of the notice period, and in the meantime, the current terms of employment will be applicable.
In addition, the employer should provide a clear offer of re-employment on the new terms to commence after the end of the notice period. Since employees have the obligation to mitigate, any potential recovery with respect to a constructive dismissal claim will likely be reduced if they reject the offer, unless they can show it would be degrading/humiliating to accept it.
To learn more about constructive dismissal in a pandemic, read our article here.