Challenging Times in Canada Present Opportunities for Creative Solutions

by Katie Clayton

In this economic climate in Canada, many employers are being forced to find ways to reduce costs, which often means layoffs. But layoffs don’t have to be the only answer — you can reduce costs without losing valuable employees.

One way businesses can do so is to slightly reduce their employees hours of work. Even a small decrease in work hours can have a significant effect on a company’s bottom line, allowing it to keep talented employees for when the economy rebounds. So how do employers go about reducing employees’ hours of work while avoiding claims that it has unilaterally altered a term of employment, which could lead to a claim for constructive dismissal?

Employers may reduce the number of hours their employees work so long as they give them reasonable notice of the change (or the notice spelled out in the employee’s contract of employment) and follow the correct procedures. Reasonable notice in this context would be of the same length that employees would get if they were being fired — and that all depends on the employees’ length of service, seniority, age and the availability of similar work having regard to the experience, training and qualifications of the employee. Meaning some employees may be entitled to longer periods of notice than others.

The duty to provide reasonable notice of a such a change, if substantial, was accepted by the Supreme Court of Canada in Farber v. Royal Trust [1997] 1 S.C.R. 846. The court said:

A constructive dismissal occurs when an employer makes a unilateral and fundamental change to a term or condition of an employment contract without providing reasonable notice of that change to the employee. Such action amounts to a repudiation of the contract of employment by the employer whether or not he intended to continue the employment relationship. Therefore, the employee can treat the contract as wrongfully terminated and resign which, in turn, gives rise to an obligation on the employer’s part to provide damages in lieu of reasonable notice.

But not all reduction in hours amount to a fundamental change to a term of employment that leads to a constructive dismissal. What that threshold is, however, is not clear. Although some cases out of British Columbia have made it clear that 25%, 40%, and 50% reductions would amount to a constructive dismissal (see JB’s Bagetelle Ltd. (Re) [1999] B.C.E.S.T.D. No. 34 in which a 50% reduction in hours amounted to constructive dismissal; Re Simpson, BC EST # D043/06 in which a reduction in hours of work by 40% constituted a constructive dismissal); Irvine (Re), [2001] B.C.E.S.T.D. No. 27 in which a 25% reduction in hours found to be substantial alteration), you can probably reduce hours of work by up to 10% without triggering the notice requirements.

If you as an employer are giving notice of a larger reduction of hours, keep in mind that the proper procedures must be followed to avoid a damages claim. In Ontario at least, the proper procedure was spelled out in the Ontario Court of Appeal decision in Wronko v. Western Inventory Services Ltd. 2008 ON CA 327 (Can L II).

First, notice should be given in writing, preferably with an explanation of the reason for the changes.

The appeal court identified three options that are then available to an employee:

1. the employee may accept the change;
2. the employee may reject the change and sue for damages if the employer persists;
3. the employee may simply make it clear that he or she is rejecting the new term.

The Wronko decision goes on to describe how employers can respond in the face of the employee’s rejection of a proposed fundamental change. The court says the employer then has two choices:

1. 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;
   • this will trigger any termination rights the employee may have;
   • this can be dealt with by providing notice of the new terms which is equal to the notice of termination to which the employee is entitled; or
2. the employer can accept that there would be no agreement to the change 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.

The bottom line is that when making fundamental changes in the terms of employment in order to shave costs, employers must be careful to follow the correct procedures. Realize that such fundamental changes can give rise to constructive dismissal claims unless clearly accepted by your employees.

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  Katie Clayton
  Katie Clayton is a partner with the Commercial Litigation practice group. Katie has a complex litigation and dispute resolution practice with a particular emphasis on product liability and corporate/commercial disputes, including breach of contract, and negligence generally. Katie's clients comprise a diverse group of national and multinational corporations that are both provincially and federally regulated. Katie also serves as the head of the Employment & Human Rights Group in the Calgary office and litigates employment law matters including issues of breach of contract, unfair competition and wrongful dismissal. Katie advises management on pre and post-termination issues, occupational health and safety matters and drafts employment agreements, restrictive covenants and workplace policies and procedures. Katie also conducts workplace investigations for clients, and advises internal investigators.