Most employers are familiar with the most common changes to employment contracts that can trigger a constructive dismissal: changing pay, hours, demotions, duties, work location, etc. However, in the March 2015 decision of Potter v. New Brunswick Legal Aid Services Commission, the Supreme Court of Canada overturned two lower court decisions, finding that an 8-week paid administrative suspension constituted sufficient grounds to declare the employment relationship constructively dismissed.
The Facts
Mr. Potter was the Executive Director at the New Brunswick Legal Aid Services Commission (the “Commission”), and had signed on to a 7-year term running until December 12, 2012. His employment could be terminated during this fixed term only by the Lieutenant-Governor in Council for cause.[1]
The relationship between the parties deteriorated and, by spring 2009, Mr. Potter and the Board of Directors of the Commission (the “Board”) had begun to negotiate the buyout of the contract.
Before the parties came to any agreement, Mr. Potter went off on a medical leave. Mr. Potter was set to return on January 18, 2010.
On January 5, 2010, shortly before his scheduled return date, the Board decided – without alerting Mr. Potter – that if the buyout negotiations were not resolved by January 11, 2010 (on the basis that Mr. Potter would receive no more than 18 months’ salary, including his retirement allowance), it would ask the Lieutenant-Governor in Council to terminate Mr. Potter’s employment for cause.
There was no resolution by January 11, 2010. As planned, the Board recommended to the Minister of Justice that Mr. Potter’s employment be terminated for cause – though this was, of course, not shared with Mr. Potter at that time.
On the same day, the Board wrote to Mr. Potter’s counsel, advising that he was not to return to work “until further direction” and that he would continue to be paid “until instructed otherwise.” Mr. Potter’s counsel sought more details from the Board on the nature of his suspension, but no answer was provided.
There were no further communications. Eight weeks later, on March 9, 2010, Mr. Potter commenced a lawsuit for constructive dismissal. In response, on March 15, 2010, the Board took the position that Mr. Potter had resigned by virtue of the legal action, and stopped all salary and benefit continuance.
Mr. Potter was 65 years old at that time, and had been earning an annual salary of $176,400, plus benefits. For the vast majority of his 33-year legal career, Mr. Potter had worked in various positions with the Province of New Brunswick and had accepted the 7-year Executive Director appointment as his last position before retirement.
The Decision
Both lower court decisions found that this paid suspension was not sufficient to constitute a constructive dismissal.
The Supreme Court of Canada (“SCC”) disagreed. While the majority and minority decisions differed in approach, all seven SCC Justices found that Mr. Potter’s paid administrative suspension had been a constructive dismissal.
Tests for Constructive Dismissal
To start, Potter is an important decision as it is the first SCC decision on constructive dismissals since Farber v. Royal Trust Co. in 1997.
Potter confirms for us that constructive dismissal can take two forms: that of a single unilateral act that breaches an essential term of the contract, or that of a series of acts that, taken together, show that the employer no longer intends to be bound by the contract.
Potter also confirms that, to address these two forms of constructive dismissal, there are two branches of the constructive dismissal test.
1. Where there is a unilaterally imposed substantial change by the employer to an essential term of the employment contract (“First Branch”).
Under this First Branch, the following two-step test must be applied to determine if there has been a constructive dismissal:
– First, the court must determine objectively whether a breach has occurred. To do so, it must ascertain whether the employer has unilaterally changed the contract. If the change was expressly or implicitly authorized by the contract, or if the employee consented to or acquiesces in the change, the change was not unilateral and there was no breach. Moreover, to qualify as a breach, the change must be detrimental to the employee.
– Second, if it is determined that a breach has occurred, the court must turn to the second step of the analysis and ask whether, “at the time the breach occurred, a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed.” Put differently, was the breach in question a “substantial breach” from the perspective of a reasonable person?
2. Where a reasonable person would conclude, when all of the surrounding circumstances are considered, that the employer no longer intended to be bound by the terms of the employment contract (“Second Branch”). This Second Branch requires a retrospective consideration by the court of the cumulative effect of past acts by the employer and the determination of whether those acts evinced an intention no longer to be bound by the contract.
Application of the Facts to the Tests for Constructive Dismissal
Potter is also an important decision as it addresses the unique situation of whether and when paid administrative suspensions in a non-union context can trigger a constructive dismissal. It confirms that employers do not have an unfettered discretion to withhold work and, in particular, even paid administrative suspensions must be reasonable and justified in the circumstances.
The majority decision[2] found that that Mr. Potter’s administrative suspension was a constructive dismissal under the First Branch. The analysis can be summarized as follows.
Under the first step of this branch, the Commission made a unilateral change to a term of Mr. Potter’s employment when it withheld work for an indefinite period. This is because:
- The Commission did not have an express contractual right to administratively suspend Mr. Potter indefinitely with pay.
- The Commission also did not have an implied right to administratively suspend Mr. Potter indefinitely with pay.
- The traditional common law rule is that an employer does not have an obligation to supply work. There are exceptions, however, to this rule that apply to employees who derive a benefit from the work itself (e.g. actors, radio or television performers; senior employees whose professional reputation is inextricably tied to the performance of the company; etc.), and to employees whose compensation is tied to the performance of work (e.g. commissions, bonuses, etc.).[3]
Mr. Potter was an executive director of a government program whose success was associated with his performance. No doubt Mr. Potter derived a reputational benefit from his work and, as such, the Commission had a duty to provide him with work.
- Even if the Commission had an implied right to administratively suspend Mr. Potter, it was not an unfettered right. An employer must not withhold work either in bad faith or without justification. Put differently, there must always be a good faith business justification for placing an employee on an administrative suspension (i.e. for withholding work).[4]
- The traditional common law rule is that an employer does not have an obligation to supply work. There are exceptions, however, to this rule that apply to employees who derive a benefit from the work itself (e.g. actors, radio or television performers; senior employees whose professional reputation is inextricably tied to the performance of the company; etc.), and to employees whose compensation is tied to the performance of work (e.g. commissions, bonuses, etc.).[3]
Factors considered by courts in making such determination include, but are not limited to, duration of suspension, whether a replacement was appointed, whether the employee was asked to return keys / property, whether the employee continued to be paid and receive benefits, whether there is evidence that the employer intended to terminate the employee, and whether the suspension was in good faith (e.g. for bona fide business reasons[5]).
Considering such factors, the Commission was unable to show that Mr. Potter’s administrative suspension was reasonable and justified. Among other things:
- He was not provided with any reason for the suspension (despite asking for it), which represented a failure by the employer to act in good faith (i.e. failure to be honest, reasonable, candid and forthright);
- He was replaced during the suspension period and that period was indefinite (i.e. 8 weeks at the time the constructive dismissal claim was commenced with no sign of a return); and
- Some steps had been taken towards terminating for cause.
After concluding that the administrative suspension was a unilateral breach by the Commission, the majority decision quickly addressed the second step of the First Branch analysis.[6] It found that a reasonable person in the same situation as Mr. Potter would have felt that the unauthorized unilateral suspension was a substantial change. As far as he knew, he was being suspended indefinitely[7] and had been given no reasons for that suspension.
The SCC set aside the decision of the New Brunswick Court of Appeal and allowed Mr. Potter’s action for constructive dismissal The Commission was ordered to pay the balance of Mr. Potter’s compensation for the remaining 33 months of his contract (at $14,700/month), less any earnings from mitigation, plus interest and costs.
Resignation by Commencing Constructive Dismissal Proceedings
Yet another reason why Potter is important is that it addresses whether the mere act of commencing a constructive dismissal action amounts to a resignation. As you will recall, the Commission took the position that Mr. Potter had resigned by virtue of having commenced his legal action, and stopped all pay and benefits at that time.
The SCC observed that, in most failed actions for constructive dismissal, it will be clear that the employee has resigned. There will, however, be instances where the commencement of a constructive dismissal action does not necessarily mean that the employee has resigned. For example, where an employee continues to work under protest of the changes in order to comply with the duty to mitigate.
Simply put, whether an employee has or has not resigned will depend on the factual circumstances of each case.
Lessons Learned
For our employer clients, what lessons can be taken from this case?
- Recognize situations where this case may apply in case those arise in your workplace.[8] For example, situations where an employee is:
- placed off work during an investigation;
- placed off work while criminal charges are pending;
- placed off work until satisfactory medical information is provided to confirm fitness to work, until the employee completes appropriate treatment, etc.;
- given working notice of termination to comply with a contractual termination provision, but is directed not to report to work for the balance of that working notice period; etc.
- Understand that you do not have an unfettered discretion to withhold work from your employees for any reason, with or without pay. It should not be assumed that only highly specialized or senior level employees may be entitled to a continuous supply of work. Rather, circumstances in which an employer may withhold work must be assessed on a case-by-case basis, taking into account the nature of the employment relationship and the fundamental importance of work to a given individual.
- Consider adding a provision to your employment contracts and investigation policies, which gives you the express contractual right to place your employees off work on administrative suspensions, without triggering a constructive dismissal. Confirm that such suspensions will be with or without pay at the employer’s discretion.
- Absent such express provision in an employee’s employment contract, if you’re considering an administrative suspension, ensure that there is a reasonable and justified basis for doing so. Among other things, this means that you ensure you know why the employee is being suspended, that the employee has been advised of these reasons, and that you communicate an expected time frame (either by indicating a specific period or completion of a process such as an investigation) that is reasonable in length, and whether pay and benefits will be continued. Be as transparent as possible to ensure you do not have, nor are perceived to have, any hidden agenda.
[1] As an appointment under New Brunswick’s Legal Aid Act, such termination occurs by way of revoking such appointment.
[2] The minority decision found that the constructive dismissal issue was more appropriately dealt with under the Second Branch. Considering all of the surrounding circumstances (including the Board’s resolution and recommendation for dismissal), administratively suspending Mr. Potter was consistent with a clear intention by the Commission to not be bound by the employment contract.
[3] In obiter, the SCC cautioned against applying the duty to provide work to narrow categories of employees. The duty must be considered on a case-by-case basis, depending on the nature of the employment relationship and taking into account the fundamental importance of work to a given individual. Quoting from the 1987 SCC decision of Reference re Public Service Employee Relations Act (Alta.): “Work is now considered to be one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.”
[4] It is at this stage of the analysis that the onus switches to the employer to establish that the administrative suspension was both reasonable and justified in the circumstances.
[5] This is the most important factor. According to Potter at p. 98: “Legitimate business reasons must always be shown, although the nature or importance of those reasons will vary with the circumstances of the suspension.”
[6] See Potter at p.106: “I would suggest that in most cases in which a breach of an employment contract results from an unauthorized administrative suspension, a finding that the suspension amounted to a substantial change is inevitable. If the employer is unable to show the suspension to be reasonable and justified, there is little chance, in my mind, that the employer could then turn around and say that a reasonable employee would not have felt that its unreasonable and unjustified acts evinced an intention no longer to be bound by the contract. Any exception to this rule would likely arise only if the unauthorized suspension was of particularly short duration.”
[7] At this stage of the analysis, a court must only consider information actually within the knowledge of the employee. As such, the fact that the Board had taken steps towards terminating for cause – unbeknownst to Mr. Potter at the time that he commenced his constructive dismissal action – was inadmissible evidence and could not be considered at the second step of the analysis. Such after-acquired evidence could be, and was, properly considered at the first step of the analysis.
[8] Potter confirms that this case is not about temporary layoffs for economic reasons, administrative suspensions for reasons unrelated to employee’s conduct (e.g. financial difficulties, shortage of work, technological change or reorganization), or disciplinary suspensions.