Constructive Dismissal Proves Costly

Date: 2007
Author: Daniel A. Lublin
Publication: Metro

Law of constructive dismissal can be confusing

Sometimes, serious changes to your job may have to be accepted.  Just ask David Chapman.  Working his way up the Bank of Nova Scotia’s corporate ladder for 36 years, Chapman resigned claiming a reduction in his salary and the Bank’s failure to honour a promise amounted to his termination.  The Court decided otherwise.
Chapman was a highly regarded senior vice president within the Bank.  Wanting a promotion to an executive vice president position, Chapman argued that he agreed to take on a new role, only if the Bank would commit to start paying him as an executive vice president.
Chapman was paid more in that year but for the next three years, the Bank reduced his total compensation, amounting to a 13% decline overall.  Importantly, however, Chapman’s base salary remained constant.  It was only the variable component of his compensation, such as stock options, company shares and bonuses which were reduced.
Following the third straight yearly decrease, Chapman met with various higher ups at the Bank and protested the decline in his salary.   Believing there was not a sufficient interest in remedying the problem, Chapman wrote to the Bank that he had “no other real option other than to leave”.
Trying to appease its long-term employee, the Bank’s president met with Chapman and outlined his options.  But it was clear the Bank had a different point of view, arguing that Chapman’s compensation model was always variable and it had reduced his salary to bring him into line with other vice presidents.
Chapman wasn’t convinced and resigned, claiming he had been constructively dismissed.  The legal doctrine of constructive dismissal permits an employee to treat fundamental changes to their job as effectively amounting to their termination.  Chapman argued the broken promise to increase his compensation and the fact that it had been reduced instead was reason enough for him to leave and then sue.
The question of whether Chapman was constructively dismissed was recently left for an Ontario court to decide.  Agreeing with the Bank and dismissing Chapman’s lawsuit, the court found that there was no binding agreement to improve Chapman’s compensation and the Bank was permitted to reduce Chapman’s pay – concluding he had always been paid in on a variable scale and had remained in the applicable salary range for his position.
The law of constructive dismissal is particularly fact driven and can be confusing, especially as similar facts don’t always lead to the same results.  Both employers and employees should, therefore, glean the following lessons from this case:

  • Pay cuts, imposed without notice, usually trigger a constructive dismissal, whereas this may not be the case for employees paid in a variable compensation scheme.
  • Commit understandings or agreements to writing, otherwise they may be misinterpreted or can vanish altogether.
  • Whether a constructive dismissal has occurred is judged on an objective standard, not simply the beliefs or intentions of the litigants.
  • Even if a substantial change has occurred, employees are not always at liberty to resign.  Seek specialized advice.