Understanding Constructive Dismissal in Canada
In the realm of Canadian employment law, a resignation is typically viewed as a voluntary decision by an employee to end the employment relationship. However, legal exceptions exist where a resignation is treated as a termination. This concept is known as Constructive Dismissal.
It occurs when an employer unilaterally changes a fundamental term of the employment contract, or creates a work environment so hostile that the employee has no choice but to resign. In these scenarios, the law may consider the employee to have been "fired," triggering entitlements to severance pay and notice.
What Constitutes a "Fundamental Change"?
Not every change to a job description qualifies as constructive dismissal. Employers generally reserve the right to make minor administrative changes. For a claim to be successful, the change must be substantial and strike at the core of the employment agreement.
Canadian courts typically identify constructive dismissal in two main categories:
1. A Single, Substantial Breach This involves a specific, unilateral change to the terms of employment. Common examples include:
Compensation: A significant reduction in salary or commission (legal precedents often cite reductions greater than 15-20% as a threshold).
Role & Status: A demotion, a removal of managerial responsibilities, or a humiliating change in reporting structure.
Location: A forced relocation to a different city that was not agreed upon in the original contract.
2. A Series of Actions (Toxic Work Environment) Even if specific terms like salary remain unchanged, a claim may arise if the employer’s conduct demonstrates an intention to no longer be bound by the employment contract. This often involves:
Unaddressed harassment or abuse.
Unsafe working conditions.
A persistent pattern of hostility that renders the continued employment relationship intolerable.
The Concept of "Condonation"
One of the most critical aspects of constructive dismissal is the timing of the objection. In employment law, there is a principle known as condonation.
If an employee continues to work under the new, changed terms for a significant period without objection, they may be deemed to have "accepted" or "condoned" the changes. Once changes are condoned, the employee may lose the right to claim constructive dismissal later.
Implicit Acceptance: Simply showing up to work and accepting the new (lower) pay rate for several months can be interpreted by courts as acceptance of the new contract.
Objection: Employees often document their disagreement with the changes in writing to avoid the appearance of condonation, even if they do not resign immediately.
The Risk of Resignation
Proving constructive dismissal carries a higher burden of proof than a standard wrongful dismissal case. In a wrongful dismissal, the termination is clear (a firing event). In a constructive dismissal, the onus is on the employee to prove that the employer’s actions forced the resignation.
This creates a complex decision matrix for employees:
If the claim succeeds: The employee is entitled to full severance pay (pay in lieu of notice) as if they had been wrongfully terminated.
If the claim fails: The resignation is treated as voluntary. The employee may receive no severance and would be ineligible for Employment Insurance (EI) benefits in many cases.
Due to this evidentiary burden, claims regarding constructive dismissal often involve a detailed review of employment contracts, written correspondence, and the specific timeline of events leading up to the resignation.
The Test for Constructive Dismissal
The standard for proving constructive dismissal is an objective test that relies on the perspective of a reasonable person. These are not two different options; rather, the "reasonable person" is the mechanism courts use to keep the test objective.
Here is the breakdown of how this standard is applied, suitable for your educational content.
The Objective Standard
Courts do not look at the situation through the subjective eyes of the specific employee (i.e., whether that specific individual felt hurt, slighted, or stressed). If the test were subjective, any employee who felt personally offended by a change could claim constructive dismissal.
Instead, the court applies an objective standard. The judge asks:
"Would a reasonable person, in the same position as the employee, have concluded that the employer’s conduct demonstrated an intention to no longer be bound by the terms of the employment contract?"
The Two-Branch Test (The Potter Test)
The Supreme Court of Canada (in Potter v. New Brunswick Legal Aid Services Commission) established a two-step analysis to determine if constructive dismissal has occurred.
Branch 1: Single Specific Breach This is the most common form. To meet the standard, two things must be proven objectively:
The Breach: The employer unilaterally changed a term of the employment contract (express or implied) without the employee's consent.
Substantial Nature: A reasonable person would regard this breach as "substantial" or "fundamental" to the employment relationship. (e.g., A 2% pay cut is a breach, but a reasonable person might not view it as "substantial." A 20% pay cut is almost certainly substantial).
Branch 2: Toxic Conduct If there isn't a specific change to a contract term (like pay or title), the court looks at the employer's cumulative behaviour.
The Test: Would a reasonable person conclude that the employer’s cumulative past acts (harassment, hostility, criticism) made the working relationship intolerable?
Why the "Reasonable Person" Matters
Using the reasonable person standard protects both parties:
Protects Employers: It prevents employees from resigning over minor inconveniences or personal sensitivities.
Protects Employees: It prevents employers from claiming "we didn't mean to fire them" if their actions objectively destroyed the employment relationship.
Summary: Constructive Dismissal in Canada
Constructive dismissal describes a situation where an employee has not been formally fired but is forced to resign due to a fundamental, unilateral breach of their employment contract by the employer. This generally occurs in two ways: through a single, substantial change to employment terms (such as a pay cut exceeding 15% or a demotion) or through a cumulative series of toxic behaviours that make the workplace intolerable.
To prove this claim, Canadian courts apply the Potter Test, an objective standard based on whether a "reasonable person" would view the employer’s actions as an intention to no longer be bound by the contract. The article emphasizes that this is a high-risk area of law: employees must be careful not to "condone" changes by accepting them for too long, as failing to prove constructive dismissal can result in a loss of severance and Employment Insurance eligibility.
If you think you may have been constructively dismissed, speak to a lawyer today.