Davies v. Fraser Collection: Is a Temporary Layoff of a Nonunion Employee a Constructive Dismissal?

You are a Human Resources Manager of a company that has lost a major client.  As a result, you have decided that you need to downsize the payroll, and you announce to an employee that he is being ‘temporarily’ laid-off, with the hope that he will be recalled shortly.   Have you breached the employee’s employment contract?
A unionized employer usually can lay off employees, provided they select the ‘victims’ in the order required by the collective agreement.  But the right to layoff in a unionized environment usually flows from direct language in a management rights’ clause in a collective agreement.   In a non-union workplace, few employment contracts contain a right to lay-off workers.  And  courts have usually refused to find an ‘implied’ right of employers to lay-off.   As a result, as the B.C.  Supreme Court ruled recently in a case called Davies v.  Fraser Collection Services, an employer who temporarily lays-off a worker will usually be committing a fundamental breach of the employment contract.
This means that the employer can treat the layoff as a dismissal and sue for wrongful dismissal (constructive dismissal), which means that the employer will be required to pay the employee lost wages and benefits for the period of ‘reasonable notice’ that should have been given.   Davies did this successfully; the court found that the required period of notice was 6.5 months.
Duty to Mitigate Damages
But then Davies ran into an odd problem.  During the period of that 6.5 months, the employer’s business picked up and it offered Davies a recall to his former job.  Davies refused that offer, and instead collected unemployment insurance benefits.  As a result, the Court ruled that Davies had failed to mitigate his damages by refusing to accept a reasonable offer by the employer to work out the notice period.  The court reduced the award to 2 months notice to account for  Davies’ failure to mitigate his loss.
This reasoning falls on the heals of the recent Supreme Court decision in Evans v. Teamsters, Local 31, where the Court ruled that the duty of a dismissed employee to mitigate their damages may include an obligation to work out the notice period with the employer who had dismissed them.  (See Sara Slinn’s commentary on Evan’s here) The question in each case is whether the circumstances of the dismissal have destroyed the mutual trust and confidence required in employment contracts.  But it appears it is not up to the employee to decide if they have lost trust in the employer, it is rather an objective test of whether a reasonable employee would feel that trust and confidence has been destroyed.  The court will look for facts that suggest the employer’s behaviour was demeaning, hostile, or embarrassing to the employee.  A good faith layoff would not  normally fall into those categories.
Moral of the story: Employers subject to a constructive dismissal complaint may want to offer the employee the chance to work out the notice period if they still trust the employee to work properly and not be disruptive.  If the employee declines, the damages the employer must pay might be reduced.