The Supreme Court of Canada clarifies the principle of constructive dismissal.

If an employer indefinitely suspends an employee for administrative (i.e. non-disciplinary) reasons and that employee responds by suing the employer, does that mean the employer constructively dismissed the employee or did the employee quit?

Recently, the Supreme Court of Canada (“SCC”) considered this question in a case called Potter v. New Brunswick Legal Aid Services Commission (2015 SCC 10). The SCC ultimately decided that an employer can only impose a non-disciplinary suspension on an employee if: a) the suspension is imposed in good faith; and b) there is a legitimate business reason for the suspension unless the employment contract expressly allows such suspensions. If the employment contract does not expressly allow non-disciplinary suspensions and the suspension is not imposed in good faith or for a legitimate business reason, then the suspension amounts to constructive dismissal giving the employee the right to sue the employer for wrongful dismissal.

Constructive dismissal occurs when an employer, though not outrightly and explicitly firing the employee, unilaterally changes a fundamental term or terms of the employment contract (eg. the employee’s compensation, work assignments or place of work) such that the employment relationship is no longer tenable. A classic example of this is where the employer unilaterally changes the employee’s basic duties (eg. a car dealership hires a person to be a salesperson then, without that person’s consent, forces the person to wash cars all day instead of selling cars). In Potter, the SCC specifically stated that constructive dismissal does not have to involve a specific unilateral change to the employee’s compensation, work assignments or place of work but could also be result of a pattern of conduct or a series of acts by the employer that indicate the employer no longer intends to be bound by the terms of the employment contract.

The situation in Potter was different than most conventional constructive dismissal cases in that the employer did not change the employee’s duties, compensation or place of work but, rather, the employee had been suspended indefinitely with pay for non-disciplinary reasons.

The plaintiff in this case, Mr. Potter, was hired by the New Brunswick Legal Aid Services Commission (the “Commission”) to be its Executive Director of Legal Aid for a term of seven years. Almost four years into his seven year term, Mr. Potter and the Commission began negotiating a buyout of Mr. Potter’s contract. Before these negotiations were completed, however, Mr. Potter went on extended sick leave.

Between three to four months after Mr. Potter went on sick leave, he received a letter from the Commission stating that, if the contract buyout negotiations were not completed within a week, the Commission would seek to terminate Mr. Potter’s employment for cause. One week later, Mr. Potter received another letter from the Commission advising him that he was not to return to work “until further direction” but that he would “continue to be paid until instructed otherwise”. Meanwhile, the Commission delegated all of Mr. Potter’s powers and duties to the person who was covering for him while on sick leave.

Mr. Potter responded to the Commission’s actions by suing the Commission for constructive dismissal. The Commission, in turn, took the position that it had never fired or constructively dismissed Mr. Potter but rather had only put him on administrative leave so, by suing the Commission, Mr. Potter had effectively resigned.

Both the trial judge and the New Brunswick Court of Appeal decided that Mr. Potter had not been constructively dismissed but, rather, he had resigned when he sued the Commission. The SCC disagreed.

Considering the case law on constructive dismissal in Canada, the SCC explained that, in order for an employee to successfully sue an employer for constructive dismissal, the employee must prove to the court that:

The employer had breached the employment contract by unilaterally changing a term of the employment contract; and

The employer’s breach of the contract substantially altered an essential term of the contract.

In other words, the employee must first show that the employer changed the employment contract in a manner that was not allowed by the contract and the employee never agreed to this change (i.e. the employer’s change was “unilateral”).

When deciding whether the employer’s breach substantially altered a term of the employment contract, the court considers whether a reasonable person in the employee’s circumstances would believe that an essential term of the contract had been substantially altered. Importantly, the SCC emphasized that “there is no requirement that the employer actually intend[s] [to] no longer be bound by the contract” as long as a reasonable person in the employee’s situation would believe that was the employer’s intention.

Applying these principles to Mr. Potter’s case, the SCC found that the Commission did not have an express authority to put Mr. Potter on administrative leave with pay (an “express” authority would be something in the nature of a specific statement in the employment contract, offer of employment or employee handbook stating that the employer has the right to suspend an employee without cause). Without such express authority, an employer would have to have a “legitimate business reason” to put an employee on administrative suspension.

The SCC further found that the Commission did not have any legitimate business justification for suspending Mr. Potter. The SCC said a court should consider, amongst other things, the following factors when deciding whether a non-disciplinary suspension is reasonable and justified:

a) the duration of the suspension;

b) whether someone was appointed to replace the suspended employee;

c) whether the employee received pay during the suspension;

d) whether the employee was asked for his or her keys;

e) whether the employee continued to be paid and receive benefits;

f) whether there is evidence that the employer intended to terminate the employee at that time; and

g) whether the employer suspended the employee in good faith, for example, for bonafide business reasons.

In the end, the Commission was ordered to pay damages to Mr. Potter for wrongful dismissal.

For more information contact Hamilton Duncan’s litigation group.