The Supreme Court of Canada Clarifies Test for Constructive Dismissal

March 23, 2015

If an employer puts a non-unionized employee on an indefinite administrative suspension with full pay but without explaining why, can this amount to a constructive dismissal? Yes, according to the Supreme Court of Canada in its recent decision of Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10.

The Supreme Court's decision in Potter is noteworthy for employers as it clarifies the common law tests for constructive dismissal, which, generally speaking, occurs when an employer shows it no longer intends to be bound by an employment contract but does not outright dismiss an employee. The Potter decision also highlights the importance of acting in good faith when dealing with employees, a topic that has been the focus of other recent Supreme Court decisions (see Bashin v Hrynew, 2014 SCC 71).

Background

The Legal Aid Services Commission hired Mr. Potter to act as Executive Director for a seven-year term. More than half way through the term, the parties discussed buying-out the remainder of Mr. Potter's contract. Before a decision was made, Mr. Potter went on sick leave. Prior to Mr. Potter's return and unbeknownst to him, the Commission's Board of Directors recommended Mr. Potter be fired for cause. Simultaneously, the Commission notified Mr. Potter that he was not to return to work following his sick leave and was being suspended indefinitely with pay. The Commission then assigned Mr. Potter's duties to someone else.

In response, Mr. Potter sued the Commission claiming his indefinite suspension amounted to a constructive dismissal. In its defense, the Commission argued Mr. Potter's commencement of legal proceedings amounted to a voluntary resignation. As such, the main question before the courts was whether Mr. Potter was constructively dismissed or whether he resigned. Both the New Brunswick Court of Queen's Bench and the New Brunswick Court of Appeal agreed Mr. Potter resigned.

Ultimate Decision

On appeal, the Supreme Court of Canada reversed the decisions of the lower courts by concluding Mr. Potter had in fact been constructively dismissed. In reaching its conclusion, the Supreme Court reviewed the law of constructive dismissal and explained that a non-unionized employee is constructively dismissed if one of the following tests is satisfied:

1. Single unilateral change: (a) The employer makes a unilateral change that breaches an express or implied term of the employment contract, and (b) this breach substantially alters an essential term of employment. To determine part (b), one must ask whether a reasonable person in the same situation as the employee would have believed that an essential term of employment was substantially changed.

2. Series of acts: A course of conduct by the employer, rather than a single unilateral change, that shows the employer no longer intends to be bound by the employment contract.

The first test applied to the Potter case. Although an employee usually bears the burden of demonstrating parts (a) and (b) of the first test, the Court explained that the burden of satisfying part (a) shifts to the employer in the context of an administrative suspension. More specifically, the employer must prove it had the authority, express or implied, to suspend the employee for administrative reasons and therefore, there is no breach.

After reviewing Mr. Potter's employment contract, the Court concluded the Commission did not have the express authority to suspend Mr. Potter for administrative reasons. In terms of an implied authority to put an employee on an administrative suspension, the Supreme Court noted that such an authority is not unfettered and is subject to a basic requirement of business justification. Factors to consider when determining whether there is a business justification include reasonable business reasons, evidence of good faith, the suspension's duration and whether the suspension is with pay. With these factors in mind, the Supreme Court concluded the Commission did not have an implied authority to suspend Mr. Potter for administrative reasons as the indefinite nature of the suspension coupled with the Commission's failure to act in good faith by withholding an explanation from Mr. Potter meant it did not have legitimate business reasons for doing so. As such, Mr. Potter's suspension was unauthorized and where a suspension is unauthorized, it will necessarily amount to a breach.

Once a breach was established, the burden shifted back to Mr. Potter to show the breach substantially altered an essential term of employment under part (b) of the first test. Again, the failure of the Commission to provide any explanation and the indefinite duration of the suspension was enough for Mr. Potter to reasonably assume an essential term of his employment had been substantially changed. In fact, the Supreme Court went so far as to say that where a breach of an employment contract results from an unauthorized administrative suspension, a finding that the suspension amounts to a substantial change is inevitable.

Because parts (a) and (b) of the first test for constructive dismissal were satisfied, Mr. Potter was successful in demonstrating he was constructively dismissed.

Lessons for Employers

The Potter case clarifies the applicable tests for constructive dismissal and acts as a strong reminder for employers to keep the following in mind:

• Paying an employee while on suspension will not necessarily avoid a successful constructive dismissal claim and the employer should have an express or implied right to place the employee on leave.
• To minimize the risk of successful constructive dismissal claims, an employer should consider including an express right to suspend an employee for administrative reasons in the employee's employment agreement or offer letter. Alternatively, the employer can include such term in an employee handbook (assuming employees sign and return an acknowledgment that they are bound by the terms of the handbook).
• An employer will have a stronger position that there is an implied term permitting it to suspend an employee for administrative reasons (as opposed to disciplinary reasons) if there are legitimate business reasons for doing so and those reasons have been communicated to the employee.

If you have any questions about the Potter case, please feel free to contact us.

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