Recent economic conditions have driven many companies to find creative ways to reduce their labour costs without resorting to layoffs. Examples of such cost-saving measures include reductions in benefits, wage and salary cuts, as well as more innovative means such as forced vacation days and work-sharing arrangements accompanied by proportionate salary reductions.  A similar idea is illustrated by the "Dalton Days" being contemplated by the Ontario government.

Such alternatives carry risks for the employer, however, particularly the risk of constructive dismissal claims. Employers attempting to cut costs should be aware that claims of constructive dismissal may arise when an employer significantly changes a fundamental term of an employee's employment without the employee's consent, and the employee resigns within a reasonable time of learning of the change. Constructive dismissal may be found to occur where an employer significantly reduces an employee's salary or changes the employee's work location, hours of work, authority, or position in a fundamental way.

To reach the conclusion that an employee has been constructively dismissed, a court will examine whether or not the unilateral changes imposed by the employer substantially altered the essential terms of the employee's contract of employment.  For this purpose, the judge must ask if, at the time the offer was made, 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.  The fact that the employee may have been prepared to accept some of the changes is not conclusive, because there might be other reasons for the employee's willingness to accept less than what he or she was entitled to have.

Employers must weigh the benefits of such cost-savings with the cost of potential claims. While there are ways for employers to reduce the likelihood of such claims, it remains unclear whether judges will be willing to take the current economic climate under consideration if and when such claims reach the courts.

Employers may be able to reduce the likelihood of constructive dismissal claims by providing notice to employees, obtaining the employees' agreement to the proposed changes, and ensuring that the cost reductions are distributed across the company. Given the significance of the changes in employment terms that have been common in Canadian workplaces over the past few years, there has been relatively little activity in terms of claims of constructive dismissal. It appears that employees are cognizant of the fact that there is a need to pull together, and as a result have been willing to work together and accept reductions to avoid additional layoffs. It remains to be seen whether this trend will continue.

For more information on the obligations of an employer when terminating an employee, you can visit our Employment and Labour website here.  You can also reach the writer at sean.morrison@gowlings.com  and our Manufacturing and Distribution website at www.gowlings.com/industry/md.asp.