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An Employment Law Puzzle: On Condonation, Pay Cuts, Consideration, and Waivers

Here’s an advanced employment law question that came up in discussions I’ve had in the course of writing my new book The Law of Work, which will be out next spring.  It is for other employment law nerds like myself.  There seems to be differing views on the answer, so I put it out there in case any practitioners, law students, academics, or other experts have an opinion.  It involves the intersection between constructive dismissal, condonation, acceptance, mutual consideration, waiver, and promissory estoppel.

Bear with me as I set this up.

Constructive Dismissal Basics:  Acceptance and Condonation

Firstly, if an employer commits a fundamental or repudiatory breach of the employment contract, an employee may ‘accept‘ that breach, quit, and sue for constructive dismissal, which is a branch of wrongful dismissal law.  That acceptance must occur within a reasonable time period, the length of which varies according to a  variety of factors assessed by judges.   See e.g. Farquhar v. Butler Brothers Supplies Ltd. (1998, BCCA).

Secondly, an employee who does not accept the fundamental breach within a reasonable time may be found by a court to have ‘condoned’ the breach, which

For Employment Law Nerds Only

For Employment Law Nerds Only

bars the employee from electing to quit and claiming constructive dismissal.  So, for example, if an employer cuts my pay by 25 percent, I can elect to treat that change as fundamental breach, quit, and claim constructive dismissal.  The principal damages I would be seeking in that lawsuit of for financial loss resulting from the employer’s failure to give me proper notice of termination.  However, if I don’t complain and instead just keep working for a period of time, the constructive dismissal case law says that I forfeit my right to quit and claim the wage cut constituted a constructive dismissal.  I will have condoned the employers’ fundamental breach of my contract.  Condonation is a bar to a constructive dismissal action.

Mutual Consideration Necessary for a Contract Modification

Now consider a different area of contract law:  the need for mutual consideration in order to modify a contract.  That law tells us that even if I agree to a substantial change to my contract that benefits the employer (such as a big pay cut), that modification is not legally enforceable unless I have received new or ‘fresh’ consideration.  There are loads of cases that stand for this proposition.  Consider for example Francis v. CIBCwhere the employee signed a written amendment to the contract that reduced the period of notice required to terminate her from “reasonable notice” to 3 months’ notice.  A decade later, when she was fired, the court ruled that amendment was not enforceable since the employee had not received any new benefit at the time.  In other words, signing an amendment and continuing to work under a modified contract does not fix the fatal deficiency of a lack of fresh consideration.

So my employer cuts my pay by 25%, but since I need a job, the job market is tight, and I have a family to feed, I keep working.  What real choice do I have.  But I’m pissed off.   If I clearly voice my objection to the change, it is difficult to see how I can be found to have agreed to it.  And indeed in cases like Wronko v. Western Inventory and the classic Hill v. Peter Gorman Ltd (1957, OCA) we all read in law school, the courts said that an employee who clearly rejects a change to an employment contract can later insist on the original terms, even if he remains in employment.

In Wronko, the court said, “the mere continuance by an employee in employment does not amount in law to an acceptance by an employee of a unilateral variation of his contract by his employer.”  Correct. Normally, then, an employee who continues to work after a fundamental change to their contract imposed by the employer may be found to be barred from later quitting and bringing a constructive dismissal lawsuit, because they will have condoned the breach.  However, the fact that they have waived their right to bring a constructive dismissal lawsuit does not mean they cannot still sue for breach of contract if the employer unilaterally cuts their pay without their agreement.  Condonation is not a bar to a common breach of contract lawsuit.

But what if I do not loudly voice my disagreement to the employer’s unilateral cut to my pay.  I just stay quiet because I fear that if I raise a fuss, the employer might just fire me, and I need a job.  Say a year passes during which I’ve been receiving 25 percent less than what I was making under the original contract.  In constructive dismissal law, I may be found to have condoned the breach and forfeited my right to quit and sue for constructive dismissal.  However, I still received no fresh consideration in exchange for having my pay cut by a 25%.  This was just a one-sided modification that benefited only the employer. So does my silence correct the problem of lack of consideration?

It is difficult to find discussion of this question in the case law.  In none of the condonation cases I’ve read does the court address the question of lack of consideration flowing to the employee in the original unilateral amendment to the contract by the employer.  That makes some sense, since at that point the employee is seeking damages for constructive dismissal so that action is pleaded in that way.  However, an employee who quits in response to a unilateral cut to compensation could plead constructive dismissal and, in the alternative or in addition, breach of contract (since the change was made without new consideration).  The damages being sought in the two claims are different:  in the constructive dismissal action, the employee is seeking damages for loss during the period of notice that should have been given, whereas in the breach of contract action, the employee is seeking damages for the loss of pay suffered during the period the employee worked while the contract subsisted.  An employee might lose the constructive dismissal claim because they have condoned the breach and therefore are out of time to bring that action, and yet still have a valid claim for loss suffered while the contract persisted.

Waiver or Promissory Estoppel?

However, even this much is not clear.  In cases like Wronko  and Hill the court emphasizes that the employee consistently voiced their disagreement to the unilateral change throughout the remainder of the contract.  This might suggest that an employee who just quietly seethes in response to the unilateral pay cut may someone lose their right to bring either claim, even though the pay cut came without fresh consideration.  Seems to me the only basis for such a conclusion would be through the application of some form of waiver or promissory estoppel doctrine.  In other words, the argument would be that the employee represented to the employer that it would not later insist on being paid according to the original contract and therefore has waived his right to sue for damages arising from the unilateral pay cut.  The ‘representation’ would come in the form of silence, non-verbal objection to the fundamental breach of the contract by the employer.  The employer made an argument like this in a case called Grimes v. Alberta (1997, Alta QB), but it was rejected on the facts in that case.

I have my doubts whether waiver or promissory estoppel could properly be applied to block an employee from seeking to enforce a compensation clause unilaterally amended to the benefit of the employer without fresh consideration.  The vulnerability of the employee in such circumstances comes into play.  However, if any of you employment law experts have thoughts on this, or know of case law that directly explores these issues, please pass them along.

My apologies to non-employment/contract law nerds.

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5 Responses to An Employment Law Puzzle: On Condonation, Pay Cuts, Consideration, and Waivers

  1. Andres Reply

    September 11, 2014 at 8:24 pm

    David, another interesting question I’ve always had pertains to why you can’t sue an employer who deprives you of a benefit under the contract without having to frame it as a constructive dismissal. For example, let’s say you earned $150k a year and under a predetermined formula you also earned a $10k bonus for the previous year. Your employer suddenly says he will not pay. The most obvious way to recover it may be by claiming a constructive dismissal, but given the size of the bonus to your overall pay there is a strong chance a court will not find the change significant enough to meet that threshold. Even if they did, you also suddenly find yourself out of a job and suing for damages.

    The other approach would be a straight forward breach of contract claim. You earned it under the contract, and the employer won’t pay it. But the caselaw (at least in BC) is very well established that suing your employer is a repudiation of the contract of employment which can result in your termination with cause.

    So it seems to create a scenario whereby an employer can deprive employees of earned benefits without any recourse by the employee. I’m not sure if this is an issue that’s already been dealt with in court, but I haven’t seen any relevant caselaw.

    • Doorey Reply

      September 11, 2014 at 9:41 pm

      Hi Andres, I’m familiar with the cases that say that filing a lawsuit against your employer amounts to a repudiation of the contract. However, I don’t read those cases as creating a general rule saying that suing your employer is cause for dismissal without notice. As I understand those cases, the repudiation is found because the claims made in the particular lawsuits evince an intention on the part of the employee to treat the contract as over–hence the lawsuit repudiates the contract. Most of those cases involve employees who have already been given notice of termination by the employer but during the notice period, they quit and file a lawsuit for wrongful dismissal arguing the notice period should be longer. Courts say that lawsuit is inconsistent with the continuation of the contract, since after all, the employee was required to work the notice period if that is what the employer wants. However, my take on the cases is that an employee who files a non-frivolous lawsuit seeking damages for the employer’s breach of contract, while making it clear that they have no intention of leaving or causing the contract to come to an end, would not be repudiating the contract. If that were the case, then as you say, employers could breach the contract with impunity so long as those breaches do not rise to the level of a fundamental breach. True, the employer may respond to a lawsuit by firing the employee, but I’d argue they have to do so with proper notice. I haven’t seen a case yet that persuades me that view is wrong. But if you see one, let me know. Best, David

      • Andres Reply

        September 12, 2014 at 6:42 pm

        Thanks for the response David. The case law in Ontario may be a little more forgiving or differently worded then in BC, where it has been expressed “that unless an employee can establish that the employer has repudiated the employment contract by constructive dismissal or otherwise, the commencement of an action for dismissal must be viewed as an unjustified repudiation by the employee.” (Lewis V. Terrace Tourism Society, [2010] B.C.J. No. 1357).

        I suppose the wording of a “repudiation of a contract by constructive dismissal ‘or otherwose’” does leave an argument that discreet issues can be litigated while employment continues but I don’t know if that discreet issue has been litigated. I’d be vary wary about counselling a client take take on such litigation lest a court finds them justifiably fired with cause.

  2. Claire Mumme Reply

    September 15, 2014 at 7:40 pm

    On the consideration issue: in at least some cases restrictive covenants introduced as amendments to an existing employment contract have been held enforceable, with the new consideration found in the employer’s forbearance to dismiss with notice if the employee refused the amendment (most I think centre on Maguire v. Northland Drugs from 1935). This argument hasn’t fared as well in other cases (and rightfully so in my opinion) but I’d assumed it’d be raised in the scenario you describe above. What do you think?

    • Doorey Reply

      September 15, 2014 at 7:53 pm

      Thanks Prof. Mumme. I’d agree with you that that argument is there for an employer. However, my reading of the forbearance–as–consideration case law suggests that the employer must express to the employee that it is forbearing to exercise its contractual right to terminate with notice for a period of time into the future. It must say “in consideration for you accepting this pay cut, the employer promises not to exercise its right to fire you for X amount of time into the future”. Forbearance will not be implied from the simple decision of an employer to not dismiss an employee for some period after it imposes a unilateral modification to the contract on the employee.

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