Can You Unilaterally Change an Employment Contract?

by Brian Smeenk

Suppose you want to change an important term of your Canadian employee’s employment contract, such as the bonus plan, future salary adjustments or the termination package. Can you do it without the employee’s agreement? If so, how?

Western Inventory Service Ltd. recently found out the hard way that it couldn’t unilaterally alter an important part of an executive’s contract — his severance package — without first terminating the contract. That termination made the company liable for the very severance package it was seeking to reduce, plus most of the executive’s legal costs.

What happened to Western Investory?
In September 2002, the company’s new president sent Darrell Wronko, one of his vice presidents, a revised employment contract. It would have reduced Wronko’s severance package from two years’ pay to 30 weeks’ pay. Wronko refused to sign. Western took the position that the termination provision of the new contract would come into effect in two years time. The company presumably reasoned that two years was the notice period to which Wronko was entitled in the event of a termination under Canadian law, and therefore it could unilaterally change his terms of employment with that amount of notice.

Wronko’s employment ended in September 2004 after Western wrote him to advise that the changed termination provision was in effect. Wronko replied that it amounted to a termination of his employment agreement (“constructive dismissal”). He sued for wrongful dismissal and claimed damages for breach of contract, that is, Western’s refusal to pay him the full severance package involving two years’ pay.

Trial judge favours the employer
The trial judge found that Western did have the right to unilaterally vary the termination provision in the employment contract, upon reasonable notice to Wronko. The judge relied on the 1997 Supreme Court of Canada decision in Farber v. Royal Trust Co. He therefore concluded that Wronko hadn’t been constructively dismissed but rather had resigned. Wronko’s claim failed.

Court of appeal overturns the trial judge
The Ontario Court of Appeal saw things differently. The court concluded that Western didn’t have the right to unilaterally change the employment contract and had in fact terminated Wronko’s employment.
The appeal court identified three options that are available to an employee when the employer attempts a unilateral amendment to a fundamental term of a contract of employment:

1. the employee may accept the change;
2. the employee may reject the change and sue for damages if the employer persists in treating their relationship as subject to the varied term (this is what is called “constructive dismissal”);
3. the employee may make it clear that he or she is rejecting the new term.

The appeal court goes on to describe how employers can respond in the face of the employee adopting the third option by rejecting the proposed change. The court says the employer then has two choices:

(a)    it can advise the employee that refusal to accept the new term will result in his or her termination, and that employment would be offered on new terms at a stated point in time; however, this will trigger any termination rights the employer may have, and the employer can deal with that by providing notice of the change which is equal to the notice of termination to which the employee is entitled; or
(b)    the employer can accept that there would be no agreement and continue employment on existing terms.

The appeal court indicated that if the employer doesn’t expressly terminate the existing employment contract, it will be taken to have acquiesced in the employee’s position. The existing contract would then remain in effect. Wronko v. Western Inventory Services Ltd. 2008 ON CA 327 (Can L II)

Lessons for Employers
This decision clarifies the law about unilateral changes.  Many observers had thought that employers could make unilateral changes with reasonable notice to the employee of the change. This decision makes it clear that the employer must actually provide reasonable notice of termination of the existing contract, not just notice of the change. However, it also confirms that the employer may accompany the termination with an offer of reemployment on revised terms.

As an employer, you must be careful to not simply assume that the changed terms will be accepted. Your silence or lack of action may constitute acquiescence to the status quo. You should obtain the employee’s explicit agreement to the changes. And you must be prepared to face the consequences of termination of the existing agreement.

This of course begs the question about what those consequences of termination might be. Recent cases have confirmed that an employee has an obligation to try to minimize the potential damages claim. And the Supreme Court of Canada recently said in Evans v. Teamsters Local Union no.31 (2008) SCC 20 Can L II; that those efforts must be objectively reasonable. More specifically, the court found that an employee should have accepted his employer’s offer to return to the workplace after he was dismissed in order to reduce his damages claim.

It would therefore appear that when you terminate an employee’s contract because of a desire to unilaterally make a material change, if you provide reasonable notice of the termimation/change, you may still not incur damages. If a reasonable person would conclude that the employee should remain in the workplace during the notice period, rather than leaving immediately and suing for damages, the employee may have no damages to claim, barring anything to the contrary in a written contract of employment.

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  Brian Smeenk, Fasken
  Brian Smeenk is a Toronto partner in Fasken's Labour, Employment & Human Rights Group. He is also editor-in-chief of Northern Exposure and a member of the Employers Counsel Network. Since 1981, Brian's practice has focused on management-side labour and employment law. He represents both private sector and public sector employers, including many multi-national companies, in all aspects of labour relations and employment law and appears before tribunals and courts at all levels.