Constructive Dismissal in Atlantic Canada: What It Is, How It Happens, and How to Avoid It
An employer does not have to say "you're fired" to end an employment relationship in law. In some circumstances, changing the relationship can have the same effect.
Organizations change.
Teams are restructured. Responsibilities move. Compensation models evolve. Reporting relationships change. Employees return from leaves. Workplaces relocate. New leadership arrives.
Employers generally need flexibility to operate their businesses.
But that flexibility has limits.
When an employer unilaterally makes a sufficiently serious change to an employee's terms of employment, the employee may be entitled to treat the employment relationship as having been terminated.
That is constructive dismissal.
For Atlantic Canadian employers, understanding where ordinary management decisions end and constructive dismissal risk begins is particularly important during reorganizations, cost reductions, leadership changes and other periods when employment relationships are changing.
What is constructive dismissal?
Constructive dismissal occurs without the employer expressly terminating the employee.
Instead, the employer's conduct effectively ends the employment contract in law.
The Supreme Court of Canada described the basic principle in Farber v. Royal Trust Co.: where an employer unilaterally makes a fundamental or substantial change that violates an essential term of the employment contract, the employee may treat the employer as having terminated the relationship and seek damages in lieu of reasonable notice.
The Supreme Court refined the analysis in Potter v. New Brunswick Legal Aid Services Commission, a case originating in New Brunswick.
The Court explained that constructive dismissal can arise in two ways.
The first involves a specific unilateral act. A court asks whether the employer breached an express or implied term of the employment contract and, if so, whether the breach substantially altered an essential term of that contract.
The second looks at a course of conduct. Even where one particular act may not be sufficient on its own, a series of employer actions may, viewed together, demonstrate that the employer no longer intends to be bound by the employment contract.
This distinction matters.
Constructive dismissal can happen suddenly.
It can also develop over time.
Not every workplace change is constructive dismissal
This is one of the most important points for employers.
Employees do not have an absolute right to prevent their workplace from changing.
A new manager, different processes, adjustments to duties or organizational restructuring do not automatically amount to constructive dismissal.
The legal analysis is contextual.
In Potter, the Supreme Court confirmed that, under the first branch of the test, the question includes whether a reasonable person in the employee's position would have felt that the essential terms of the employment contract were being substantially changed.
New Brunswick courts have similarly emphasized that the employee's personal perception is not determinative. The analysis is objective and depends on the circumstances and the employment contract.
That means there is rarely a useful rule such as:
"A 10% pay reduction is constructive dismissal."
Or:
"Changing someone's title is safe as long as their salary stays the same."
The significance of a change depends on the employee's contractual terms, position, compensation structure, responsibilities, history, the employer's conduct and the surrounding circumstances.
Compensation changes can create significant risk
Compensation is one of the clearest areas of constructive dismissal risk.
A significant unilateral reduction in salary may fundamentally alter the employment bargain.
But compensation is broader than base salary.
Employers should consider changes to:
commissions;
bonuses;
benefits;
allowances;
incentive compensation;
guaranteed hours; and
other significant components of the employee's total compensation.
In Farber, the Supreme Court discussed cases involving unilateral changes to compensation calculations and significant reductions in employee income as examples of changes that courts have treated as capable of supporting constructive dismissal.
The important word is significant.
A change affecting compensation does not automatically produce constructive dismissal. The magnitude and nature of the change, the employment contract and the surrounding circumstances all matter.
Employers considering material compensation changes should therefore assess the employment-law implications before announcing them.
A demotion can exist even without a salary reduction
Employers sometimes focus heavily on compensation and overlook status, authority and responsibility.
That can be a mistake.
A significant reduction in duties or authority may support constructive dismissal even where compensation remains unchanged.
The Supreme Court recognized in Farber that demotions involving reduced prestige and status have been treated as substantial changes to essential employment terms.
There is also Atlantic Canadian authority directly on this issue.
In Saint John Shipbuilding Ltd. v. Snyders, the New Brunswick Court of Appeal restored an arbitrator's decision involving an executive who experienced a loss of status and authority after another superior was placed above him. The underlying finding characterized what occurred as a de facto demotion and constructive dismissal.
This is why an employer should look beyond the organizational chart when restructuring a position.
Ask what the employee actually did before and what they will actually do afterward.
Has decision-making authority disappeared?
Have significant responsibilities been removed?
Has the employee moved from leading a function to performing substantially narrower work?
Has their status within the organization materially changed?
Keeping someone's salary and title unchanged does not necessarily answer those questions.
Suspension requires particular care
Potter provides an important lesson for employers considering administrative suspensions.
David Potter was the Executive Director of the New Brunswick Legal Aid Services Commission. Following deterioration in the employment relationship and discussions about a potential buyout, he went on sick leave.
Before his anticipated return, the Commission recommended that his employment be terminated for cause. He was subsequently suspended indefinitely with pay, his duties were delegated to another person, and the Commission did not tell him about its recommendation to terminate his employment.
The Supreme Court ultimately found that he had been constructively dismissed. Among other things, the Court considered the indefinite nature of the suspension, the absence of authority for it in the circumstances, the failure to provide reasons, and the Commission's concealed intention to seek his termination.
The decision does not mean that every paid suspension constitutes constructive dismissal.
It means that employers need to consider whether a suspension is authorized and whether it is reasonable or justified in the circumstances. The purpose, duration, communication surrounding the suspension and terms of employment can all matter.
This is particularly relevant when an employee is being removed from the workplace pending an investigation.
An administrative suspension should not be treated casually simply because the employee continues to receive pay.
Constructive dismissal can happen one change at a time
Some of the most difficult situations do not involve one dramatic announcement.
Instead, the employment relationship changes gradually.
Responsibilities are removed.
Then reporting lines change.
The employee is excluded from meetings.
Authority shifts elsewhere.
Compensation opportunities diminish.
A promised role does not materialize.
Individually, the employer may view each event as relatively minor.
Collectively, they may tell a different story.
That is the significance of the second branch of the Potter analysis. Courts may consider whether a series of acts, viewed cumulatively, shows that the employer no longer intends to be bound by the employment contract.
Employers therefore need to consider the cumulative effect of changes, not just whether each individual decision appears defensible in isolation.
Workplace conflict is not automatically constructive dismissal
A difficult employment relationship does not necessarily amount to constructive dismissal either.
Employees and managers disagree. Performance concerns arise. Teams experience conflict. Employers investigate complaints and make decisions employees dislike.
Constructive dismissal is a contractual legal concept.
The question is not simply whether the employee believes the workplace has become unfair or unpleasant. The employee's perception alone is not determinative. Courts examine the employer's conduct objectively and in the context of the employment relationship.
That distinction is important for both employers and employees.
At the same time, employers should not assume that a series of significant changes becomes legally irrelevant simply because each has been characterized as a "management decision."
The substance of what happened matters more than the label attached to it.
The employment contract matters
Before making a significant change, one of the first questions should be:
What does the employment contract permit?
A properly drafted agreement may give an employer flexibility in particular areas.
But contractual language needs to be considered carefully. The existence of a clause giving the employer some discretion does not necessarily authorize every possible change.
In Potter, for example, the Supreme Court examined whether the employer had an express or implied contractual authority to impose the suspension at issue. The Court concluded that it did not have authority to suspend Mr. Potter indefinitely with pay for the reasons given.
This is another reason employment agreements should not be reviewed only when someone is hired or terminated.
They matter while the relationship is changing too.
Consent changes the analysis
Constructive dismissal generally concerns unilateral employer conduct.
That makes employee agreement important.
If an employer proposes a significant change and the employee validly agrees to it, the legal analysis is different from a situation where the employer simply imposes the change.
But employers should be careful about what they characterize as consent.
Silence is not always a reliable substitute for clear agreement.
Neither is telling an employee that a significant change is happening and assuming that continuing to report for work resolves the issue.
There can also be contractual and consideration issues when employment terms are changed during an existing employment relationship.
Where the proposed change is significant, obtaining legal advice before implementation can be considerably less expensive than determining afterward whether the employee agreed to it.
Reasonable notice of a change may also matter
Another option can sometimes be to provide appropriate advance notice of a significant change rather than imposing it immediately.
The underlying principle is that an employer generally cannot simply rewrite fundamental contractual obligations unilaterally and expect the employee to absorb the consequences.
Depending on the circumstances, an employer may be able to terminate the existing employment arrangement on appropriate notice and offer employment on new terms after that notice period.
This requires careful planning.
The amount and type of notice required can depend on the employment agreement, applicable employment standards legislation, common law principles and the employee's circumstances.
Employers should therefore obtain advice before relying on this approach.
Watch for constructive dismissal risk during organizational change
The greatest opportunity to avoid a constructive dismissal problem is often before a restructuring or employment change is announced.
When considering a material change affecting an employee, employers should ask:
What does the current employment agreement say?
Identify both express contractual terms and relevant aspects of the established employment relationship.
Is the change actually required?
Distinguish operational necessity from preference.
How significant is the change?
Consider compensation, responsibilities, authority, status, hours, location and other material aspects of the role.
What is the cumulative effect?
Look at other recent changes affecting the same employee.
Does the employer have contractual authority to make it?
Do not assume that general management discretion answers the question.
Can the employee's agreement be obtained?
If so, ensure the change is documented appropriately and the agreement is legally effective.
Would advance notice be appropriate?
For some changes, implementation strategy can materially affect the legal risk.
Are other legal obligations engaged?
A proposed change may also intersect with human rights, accommodation, employment standards, occupational health and safety, privacy or other obligations.
How will the change be communicated?
The explanation given to the employee should accurately reflect what is happening and why.
A resignation may not be a resignation
Constructive dismissal creates a particularly important practical risk.
An employee may send a letter saying they are resigning.
That does not necessarily mean the legal analysis ends there.
If the employee resigned in response to a fundamental breach of the employment relationship, they may allege that the employer had already constructively dismissed them.
In Farber, the Supreme Court explained that where the employer has unilaterally imposed substantial changes to essential employment terms, an employee who leaves in response may be treated as having been dismissed rather than having voluntarily resigned.
Employers should therefore pay attention to the circumstances surrounding an unexpected resignation, particularly where significant employment changes have recently occurred.
Change the workplace without accidentally ending the employment relationship
Constructive dismissal does not prevent employers from restructuring their organizations.
It does require them to understand the employment relationships they are changing.
The safest question is not:
"Are we allowed to restructure?"
It is:
"What are we changing about this employee's employment, what does their contract permit, and how should we implement that change?"
Sometimes the answer will be straightforward.
Sometimes employee consent, advance notice or a different implementation strategy will be appropriate.
And sometimes a proposed change is significant enough that the employer should understand the potential termination liability before proceeding.
That analysis is much easier before the employee receives the announcement.
Resonance HR Law works with employers across Atlantic Canada on employment agreements, organizational restructuring, compensation changes, workplace investigations, accommodation, terminations and other changes to the employment relationship. Early advice can help employers understand their options and structure workplace changes with the legal consequences in mind.
Planning changes to an employee’s role or compensation?
Resonance HR Law helps Atlantic Canadian employers assess constructive dismissal risk and plan workplace changes. Talk with our team before announcing significant changes.
This article is for general informational purposes only and does not constitute legal advice. Employment law is jurisdiction-specific and changes frequently. Contact Resonance HR Law for advice tailored to your circumstances.