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SCC Revisits, Clarifies (Sort of) Constructive Dismissal Law

March 31, 2015

March was a good month for me.  I was cited by the Supreme Court of Canada twice in the span of about a week!  The first citation was in the collective bargaining case MPAO v. Canada, where the court cited my paper Graduated Freedom of Association: Worker Voice Beyond the Wagner Act.   The second reference was in an important new constructive dismissal decision called Potter v. New Brunswick Legal Aid Services.  It took me a while to get to this latter decision, but here is my summary.

Facts

Potter was employed as an Executive Director, appointed under a statute for a 7 year period.  About half way through that term, the employer decided that it didn’t want to

Potter v. N.B. Legal Aid: SCC Explains Constructive Dismissal

Potter v. N.B. Legal Aid: SCC Explains Constructive Dismissal

keep Potter around for the rest of the contract and it initiated a negotiation with Potter about a buy out.  Unbeknownst to Potter, the employer had asked the Minister of Justice to fire Potter for cause.  Potter went on sick leave, and before he returned, the employer advised him that he was being placed on an indefinite term “administrative suspension with pay”, refused to tell Potter why, and it assigned his duties to another person.  After 8 weeks’ of this ‘suspension’, Potter quit and sued for constructive dismissal.  The lower court and Court of Appeal found in favour of the employer, ruling that the Potter had resigned.

Decision

The SCC overruled the lower court and found in Potter’s favour.  There were two concurring decisions, and a bunch of interesting little points found in the decisions.

The Court recognizes the two approaches to constructive dismissal (CD) that I described back in my 2005 article called “Employer Bullying:  Implied Duties of Fair Dealing in Canadian Employment Contracts”, which the Court cites in the Potter case. The two approaches are:

1.  Repudiation by Breach of a Term(s) of the Contract, where a substantial breach of contract evinces an intention to no longer be bound by the contract;

2. Repudiation Without a Specific Breach of Contract, if the employer’s conduct evinces an intention to no longer be bound by the contract in the future.

Repudiation By Breach of Contract

Most CD cases are dealt within under the first approach, and the majority of SCC judges (5 of them) in Potter rely on that approach, with Wagner J. penning the decision.  In this first approach, a CD occurs when (1) the employer commits a breach of contract; and (2) that breach “substantially alters an essential term of the contract”–in other words, the breach was a “substantial breach” of contract.

(a)  Was there a Breach of Contract by the Employer?   Yes.

At step one of this approach, the Court decides if an expressed or implied term has been breached by the employer.  At the second step, the Court must decide 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 contract were being substantially changed” [from the Farber decision of the SCC, para. 26].

Wagner J. ruled that the right to put Potter on “administrative suspension” [i.e. non-disciplinary] with pay was neither an expressed nor an implied term of the contract. The employer argued that it had not breached the contract since it had no obligation to provide work to Potter.   It noted the general rule in the common law that an employer does not need to ‘provide work’ to an employee, except when (1) the employee derives a benefit from actually working or (2) the employee is paid by commissions.  The employer argued neither exception applied, and therefore it was permitted by the contract (or not prohibited) to tell Potter to stay home.

The Court rejected that argument.  Firstly, Potter was the executive director and did derive a reputational benefit from working.  Secondly, his suspension prevented Potter from performing obligations assigned to him by statute. And thirdly, and most interestingly, the Court said that an employer never has a right to withhold work from an employee unless it can demonstrate that it has legitimate and good faith business reasons for doing so.  This is where my article came into play.  The Court referred to it for the point that imposing an obligation on employers to demonstrate a legitimate business reason for an administrative suspension was consistent “with the employer’s duty of good faith and fair dealing that has been gaining acceptance at common law”.(para. 84).   So, from now on, employee counsel, be sure to refer to me whenever you make the argument that the common law recognizes a duty of good faith, fair dealing by employers towards employees. :-)

Here, the employer did not have a legitimate business reason for the administrative suspension, a requirement for a finding that there is an implied term permitting that suspension.  The employer cannot be said to have demonstrated legitimate business reasons, because it provided Potter with no reason at all for the suspension.  The Court said that an administrative suspension will usually not be justified where there has been no communication with the employee about the reason. This creates a procedural duty on the employer to engage in honest dialogue before imposing a paid non-disciplinary suspension. ”At a minimum acting in good faith in relation to contractual dealings means being honest, reasonable, candid, and forthright.” (para. 99)   

b.  Was that Breach of Contract “Substantial” and therefore a CD?  Yes.

The Court found that a “reasonable person” in Potter’s position would have felt that the essential terms of the contract were being substantially changed”.  Wagner J. says that at this second step of the first approach to CD, only facts the employee knew at the time he resigned can be considered.  When I read this, I cringed, because I wondered then why an employer is permitted to go on a fishing expedition after it has terminated an employee for cause.  An employer can  So, why, we might ask, should an employee not be permitted to rely on evidence of employer wrongdoing learned after he has resigned in a CD case?  I was relieved to see that the second judgment written by Cromwell J. (concurred by McLachlin) addresses this incongruence head on.

Wagner J. rules that Potter believed he had been indefinitely suspended, for no known reason.  A reasonable employee in that situation would believe that the employer did not intend to abide by key terms of the contract. Therefore, the suspension was a constructive dismissal.  Potter wins.

Repudiation Without a Specific Breach of Contract

Cromwell and the Chief Justice preferred the second approach to CD.  They ruled that the employer’s suspension of Potter while it attempted to bargain a buy out of his contract would have demonstrated to a reasonable person that the employer did not intend to continue to be bound by the contract in the future.  Moreover, the lower court should have allowed into evidence and considered the secret correspondence by the employer to the Minister seeking Potter’s termination for cause.

“A party alleging repudiation (Potter) may rely on the other party’s conduct up to the time he accepted the repudiation and sued for CD, even if he is unaware of it at the time.” (171).  

“This principle is the mirror image of the common law principle that an employer who dismissed an employee for cause may generally rely on any cause that in fact existed at the time of the dismissal even if the employer was not aware of it at the time.” [177]

Exactly. When all the facts are weighed, including the secret letter, it is clear that a ‘reasonable person’ in Potter’s position would have concluded that the employer no longer intended to comply with the contract going forward.  That is a CD. Potter wins.

Concluding Thoughts

Nothing revolutionary occurs in this decision.  It is more clarification of the law of CD then evolution of it.

As I make clear in my article cited by the SCC in this case, I have not been a big fan of the Repudiation without a Specific Breach approach, especially for employees.  I preferred that employees rely on a breach of contract.  In particular, in almost any scenario in which an employee would argue repudiation without a breach, they could argue that the employer breached the implied term requiring the employer to treat the employee with civility, respect, decency, and honesty that has been applied in recent years by Canadian courts.  That term was certainly breached in Potter’s case, in my opinion, but Potter did not argue that.  Similarly, in the Shah v. Xerox case, which the SCC cites as an authority for the repudiation without a breach approach, the employer clearly violated this implied term by harassing Shah for an extended period of time.

I argued back in 2005 that employees would be better served by expanding the scope of the implied duty of decent treatment than to fall back on the second approach.  One reason is that employees can recover additional damages for breach of an implied term requiring decent treatment, since it is an independently actionable contract term, separate from the notice of termination clause.  Prior to Honda v. Keays, an independent actionable contract term was needed to recover aggravated and punitive damages in a wrongful dismissal case.  Now it is not needed for aggravated damages, but the possibility of recovering separate damages for breach of an implied term still exists.  It would be more difficult to win additional damages (beyond those for lack of notice) when the  the repudiation without a breach approach is used.

However, the unfortunate disagreement between the two rulings in Potter on the admissibility of  evidence not known to the employee at the time he resigns may mean that an employee relying on such evidence will need to argue the repudiation without  breach approach to be safe.  Seems a little odd that evidence is admissible if you frame your case one way, but not the other way.

Your thoughts and comments, as always, are invited.

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