Constructive Dismissal Defined

Two decisions of the Supreme Court of Canada, Farber v. Royal Trust Co.1 and the 2015 decision Potter v. New Brunswick Legal Aid Services Commission2 set out the law of constructive dismissal in Canada.

In Farber, the Court defined a constructive dismissal as follows at paragraphs 24-26:

Where an employer decides unilaterally to make substantial changes to the essential terms of an employee’s contract of employment and the employee does not agree to the changes and leaves his or her job, the employee has not resigned, but has been dismissed. Since the employer has not formally dismissed the employee, this is referred to as “constructive dismissal”. By unilaterally seeking to make substantial changes to the essential terms of the employment contract, the employer is ceasing to meet its obligations and is therefore terminating the contract. The employee can then treat the contract as resiliated for breach and can leave. In such circumstances, the employee is entitled to compensation in lieu of notice and, where appropriate, damages.

On the other hand, an employer can make any changes to an employee’s position that are allowed by the contract, inter alia as part of the employer’s managerial authority…

To reach the conclusion that an employee has been constructively dismissed, the court must therefore determine whether 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 whether, 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.

In Potter the Court reiterated that Farber remains the leading authority on the law of constructive dismissal but sought to clarify the law by recognizing that two branches of the test for constructive dismissal had emerged in the jurisprudence. A constructive dismissal will have occurred if the requirements of either branch are established.

The first branch has two steps. The first step one requires the court to determine, objectively, whether the employer’s single unilateral conduct breached an express or implied term of the employment contract. A breach under this branch would include typical constructive scenarios such as a demotion or reduction in pay. The Court emphasized that if an express or an implied term in the employment contract gives the employer the authority to make the change, or if the employee consents to or acquiesces to the change, the change will not constitute a constructive dismissal.

If there has been a breach, the second step requires the court to determine whether a reasonable person in the same situation as the employee would view the breach as substantially altering an essential term of the contract. A minor breach that does not substantially changed an essential term of the contract will not amount to constructive dismissal.

The second branch of the test for constructive dismissal recognized by the Supreme Court of Canada is applied if there has been a series of acts that, taken together, show that the employer intended to no longer be bound by the employment contract. An example of a constructive dismissal that would fall under this branch would be an employee who claims constructive dismissal triggered by a poisoned work environment. The employee is not required to point to an actual to an express or implied term of the contract, such as a reduction in compensation, that has been breached as a result of the unilateral change.

Applying Farber, the requisite elements of a constructive dismissal can be broken down as follows:

      1. the employer must change the terms of employment without the employee’s express or implied consent;
      2. the change(s) made to the terms of the employment contract must go to the very heart of the contract.  Minor changes to the terms of the employment contract will not trigger a constructive dismissal; and
      3. the employee must resign from her employment within a reasonable period of time and claim constructive dismissal.

A wrongful dismissal action (i.e. litigation) in which a plaintiff has claimed that he or she was constructively dismissed can be broken down as follows:

      1. the plaintiff must prove on the balance of probabilities that he or she was constructively dismissed;
      2. if the plaintiff has proven that he or she was constructively dismissed the court will award damages for wrongful dismissal (i.e. an order to pay money to the dismissed employee) for the employer’s failure to provide proper notice of dismissal.  The defendant employer will also be required to pay a portion of the plaintiff’s legal costs; or
      3. if the plaintiff is unable to prove that he or she was constructively dismissed, the court will find that a resignation occurred and, therefore, the plaintiff is not entitled to notice of dismissal.  The plaintiff, having lost at trial, will likely be required to pay a portion of the employer’s legal costs.

  1. Farber v Royal Trust Co., 1997 CanLII 387 (SCC);
  2. Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10;