Redefining Constructive Dismissal: Chapter Three - The Limits of Acquiescence

In Chapter One, we discussed the Duty to Make a Timely Election, and how - properly analyzed - that's really just a distinction between accepting a repudiation versus affirming the original contract, and that neither option has the effect of adopting the changes as new contractual terms.

And yet, the case law is littered with decisions about employees who, having worked under the amended terms and conditions for x period of time, have tacitly accepted the changes into the contract itself.

And there are cases where this has weight.  Imagine a case where I'm entitled to six months' pay in lieu of notice, and the employer unilaterally reduces my compensation without notice.

Under my earlier proposed analysis, if I say nothing and continue showing up for work, I am ostensibly electing to 'affirm' the contract, which means that my employer's reduction in my wages is a breach of that contract for which I am entitled to damages, at least for the six month notice period.

But the tough question here is whether or not I can sit on my hands for two years, say "I never agreed to work for reduced wages", and sue for a two year top up, when the employer would have been entitled to terminate the existing contract on six months' notice in the first place?

The equities would seem to suggest 'no', and yet a close doctrinal analysis in most real-world scenarios might lean the other way.

The Theory

We know that employers are usually able to terminate employment relationships on notice. There's case law suggesting that they're also entitled to make unilateral changes upon similar notice.  (That is, perhaps, less clear as a matter of doctrine, but given that there's zero question as to an employer's ability to terminate the relationship and re-offer employment on revised terms, it's really more of a question of 'process': What does an employer have to do to be able to characterize the employee showing up, the day after the new terms become effective, as acceptance of those new terms?)

In a perfect world, if an employer understood that it (a) doesn't have the power to unilaterally change the terms of the contract, and (b) that an employee simply showing up for work after the employer's repudiation doesn't necessarily signal agreement to terms...

...then the employer who wanted the relationship to continue, but on adjusted terms, would require express assent to the new terms, failing which it would take the extra steps of giving notice of termination of the existing contract and re-offering employment on those adjusted terms.

Employer: I'm cutting your pay, effective immediately.
Employee: No, I elect to affirm the existing contract on its existing terms, and require you to pay the agreed-upon compensation for my labour.
Employer: In that case, I terminate the contract effective on date x, and offer to employ you at reduced pay effective the day after that.

Assuming that the employer gave adequate notice of termination, then at the end of that period, there's no longer any question of the employee 'affirming' a contract that no longer exists, or mitigating damages for something that wasn't a breach of contract, etc. By showing up for work the next day, the employee can only be signalling one thing: Acceptance.

In real life, though, that seldom happens. It requires an unrealistic level of legal sophistication of both the employer and the employee, in terms of understanding their contractual rights and remedies, and the nature of the 'election' following a repudiation.

The Real World

Far more often, the employer implements a unilateral pay cut, and then...the employee just continues to show up. The unilateral action by the employer doesn't seem, to non-lawyers, to demand any response or election by the employee, because it's not as if the employer is actually giving the employee a choice.

But if - as we would tend to in most scenarios - we interpret the employee's continued performance of their duties under the contract as an affirmation of the contract itself, then we have a scenario where the employee is simply standing on their contractual entitlements, while the employer has failed to effectively do anything by defectively advising the employee of the change.

To really bring out this problem, let's talk about some different types of unilateral changes with different types of features.

Classifications of Unilateral Changes

There are several different types of unilateral change.  For present purposes, I propose a categorization system, along two axes based on whether or not the change is ongoing or isolated; and whether it's exclusively within the control of the employer to implement, or it materially modifies the performance being demanded of the employee:

1. Ongoing Employer-Controlled ("OEC") changes, where the 'change' involves something perpetual or regular, and entirely within the control of the employer to do without input of the employee.  A salary cut would be an example of this: Every pay period, the employer pays less than the agreed-upon sum, and it requires nothing of the employee different from the existing contractual terms.
   
   
2. Isolated Employer-Controlled ("IEC") changes, where the change involves something irregular - a one-off, an expressly temporary change, or something that happens relatively rarely, where, again, the employee has no input or control, and where the employee continuing to show up in the weeks and months afterward is fundamentally unaffected by the change.  Examples of this would include a temporary layoff.
   
   
3. Ongoing Work-Affecting ("OWA") changes, where the change implemented by the employer requires the employee to do something different as part of their job.  Changes to duties or work locations would fall within this category.
   
   
4. Isolated Work-Affecting ("IWA") changes, where the change implemented by the employer requires something new of the employee on a temporary basis. This is a rarer category in practice, because a one-off requirement to do a required task is far less likely to amount to an actionable breach in general, but there are certainly cases where it would be conceivable, such as where an employee is required to do something demeaning or illegal.

There are, of course, grey areas. If the employer refuses to pay out an annual bonus, is that on OEC or an IEC change?  That may be context-dependent.  What about a change in reporting structures?  On the one hand, telling the employee to physically report to and communicate to a different individual has OWA features, but telling the employee to take direction from somebody new has more OEC features.  How about bonuses?  Simply refusing to pay somebody an annual bonus is probably IEC; but making a unilateral change to the bonus policy is probably OEC.

(Also, I don't want to ignore Shah-type constructive dismissals, where toxic work environments amount to unilateral changes, but these too can bridge all the different categories.)

But these structures capture the fundamental characteristics that create analytical differences worth parsing.

For OEC changes, like wage cuts, it seems ostensibly troubling to allow an employee to lie in the weeds indefinitely (and, in particular, well past the expiration of any reasonable notice period), and then come back and say, "Wait a second, you never properly changed the contract, and therefore I'm still entitled to the higher pay."  Conversely, though, for IEC changes, the expectation seems to be the opposite: If you put me on a brief temporary layoff, and I return upon recall without making a stink, my silence isn't really prejudicial at all to the employer, whereas the employer later taking the position that my silence in the face of its breach of contract creates an enduring right to lay off again at some indeterminate point in the future...seems both morally and analytically problematic.

In an IEC context, if the employee can assert a claim for damages based on the employer breach, the employee may be entitled to do so within the limitations period.  If the employee wants to take the position that the breach repudiated the relationship, and wants to accept that repudiation, the employee has a finite period of time to make such an election. But simply not doing so can't be regarded as conferring upon the employer a new contractual right.

When you move into the OWA and IWA categories, there's an additional challenge in the sense that you're no longer just dealing with employee silence, but a more active form of acquiescence.  Still, given the breadth of the employee's obligation to 'do what they're told', it creates a pretty fine distinction between "I showed up and did my job as always" and "I showed up and did what I was told".

I don't see the IWA as being all that different, in practice, from the IEC category: An employee who complies with an improper one-off direction, followed by a return to normalcy, shouldn't generally be taken as permanently acquiescing to an employer right to give such a direction.  The presumption, upon the return to normalcy, would seem to be that it's a full return to the status quo.  But following an employer direction that the employer didn't necessarily have the right to make, again, isn't enough to confer upon the employer a new contractual right.

An OWA change probably has the strongest claim to substantively changing the terms of the employment contract: Where, for a prolonged period of time, the employee has actually performed a new requirement, later taking a position that the requirement is inconsistent with the requirements of the job...seems an uphill battle.  But let's set aside the evidentiary and interpretive concerns surrounding the possibility that the courts might conclude that this obligation always formed part of the contract, and assume for the sake of argument that...it didn't.

Thought Experiment: Changing Work Locations

As a hypothetical, let's take a scenario where I am hired to work in Edmonton, where I live. The contract is clear: The job site will be Edmonton, and only Edmonton, and there's no expectation for travel or work at other sites.

Then, one day, my boss says, "We're closing our Edmonton office. From now on, you're working in our Red Deer office." This adds two hours per day to my commute and $1000/month in gas and additional wear and tear on my vehicle - so, even if I don't take the position that I've been constructively dismissed, and I comply with the direction to report to Red Deer, there are probably recoverable damages attributable to the employer's breach.

Now, I can take the position that the change repudiated the contract, I was constructively dismissed, and I accepted the Red Deer position in mitigation of my losses.  Then I sue for damages - being pay in lieu of notice, less my mitigation earnings, adjusted for my 'cost' of mitigation (representing the pecuniary costs of transit and the non-pecuniary losses in respect of time and lifestyle). This analysis means that the Red Deer employment is a separate contract, and the old contract is dead.

Or I can affirm the contract, continue to report for work as directed, and assert that by requiring me to attend at Red Deer, the employer is breaching the contract - and that these costs flow in a foreseeable manner from that breach.

Both of these approaches get me damages to the end of a reasonable notice period.  In the former, my claim for damages clearly ends at the end of the reasonable notice period.  On the latter analysis, however, when I affirmed the contract, that had the impact that the contract - as originally signed - still governs the relationship.  And without some event to terminate it (i.e. one party or the other giving unambiguous notice of termination) it continues to govern the relationship.

Two Options

Here's the key question I've been dancing around for this whole series: At what point, if ever, can the employee 'continuing to show up' be seen as assenting to changed contractual terms.

I've come up with two plausible approaches. For a long time, I was leaning toward the former as a palatable compromise between 'real world' practice and sound doctrine.  But the more I think about, the more I'm inclined to think that the latter is right solution.

Implied Notice of Termination

The first is that we, as a matter of law, decide that an employer's unilateral ongoing change has the implied effect of terminating the existing relationship (whether at the end of the notice period or otherwise) and replacing it with new terms.  The employee is entitled to any damages arising in the applicable notice period, but once the notice period expires, the old contract and any remedies under it have entirely run their course.  Therefore, showing up for work afterward unambiguously amounts to an acceptance of the new terms.

There are a series of doctrinal problems with this analysis: Not all unilateral changes are sufficiently fundamental to regard as repudiating the relationship in the first place; termination ordinarily has to be unambiguous; it implies acceptance by the employee based on conduct extending past thresholds of which the employee can't possibly be expected to know. Most fundamentally, we'd be interpreting the change in a manner in which the employer has often specifically crafted it to avoid.

But, if we can soften those rough edges, it has the advantage of landing where reasonable expectations would - that the employer is on the hook for damages for failing to give reasonable notice of the change, but that continuing the relationship past that period is understood and agreed to be on the new terms.

I would highlight that, for the IEC and IWA categories, this approach seems wholly inappropriate even on the equities.

Strict Contractual Approach

The second is that...we don't read employer changes so charitably. In the absence of an unambiguous termination of the existing contract, or an unambiguous agreement to new contractual terms, the original contract continues to govern. An employer breach, met with an express or implied employee affirmation of the contract, means that the contract is unchanged, and the employer is simply on the hook for any failure to comply with the terms.

This doesn't foreclose the possibility of estoppel-based arguments against employees who inflated their entitlements by deliberately sitting in the weeds - but I'd probably limit that to the rare scenario of an employee who is more legally sophisticated than the employer.

This leaves open a range of contextual questions, such as whether the change itself actually carries within it an express termination (NB: not just a repudiation); and whether the employee clearly elected to accept a repudiation.

But to the extent that this seems like a big leap from the status quo, I think the reason for that is the status quo seems to accept that there is some employer right to unilaterally change a contract, and that there's some affirmative obligation on employees to challenge a breach. And those assumptions seem broadly inconsistent with contract law generally, and unrealistic in light of the existing power imbalance in the employment relationship.

Employers have broad power over an employee within the confines of a typical employment contract; the contract itself gives the employer substantial authority to direct what work is to be done and how, and puts expansive obligations on the employees to do what they're told.  But one power that the contract absolutely cannot confer upon the employer is the power to unilaterally change the terms of the contract.

And, in a context where an employer has significant power to tell the employee what do to, it's oppressive to deprive them of meaningful contractual rights perpetually because they did what they were told.

So I would suggest that we need a paradigm shift. We need to abandon the language of 'unilateral change' altogether, and replace it with 'breach'. We should stop fostering an attitude that employers are entitled to make whatever changes to the relationship they want, and that so long as they're not putting the employee into a position to be able to quit and claim meaningful damages, the 'changes' become part of the contract. Instead, we need to foster a culture of consent in employment relationships.

Put very simply, if an employer wants to change the terms of the existing contract, it needs to either secure employee consent, or terminate the existing contract.

To the extent that this amounts to a hard turn that doesn't reflect current expectations of employers...it should.  It's not a difficult thing for employment lawyers and HR professionals to message, and the attitude it challenges, that employers are somehow entitled to make these changes and that employee consent doesn't really matter, is toxic.

Consider, for a moment, why employers don't want to take such steps:  They don't want to give the employee a choice because the employee may say no; but they don't want to actually pull the trigger on termination because they're worried that actually terminating the contract might expose them to unanticipated liabilities - say, if they get the notice period wrong (assuming they're willing to honour the contract through a notice period in the first place), or if the timing/circumstances/context may give rise to bad faith or discrimination allegations.

So they'd rather just unilaterally change the contract, because that leaves open arguments down the road about whether or not the conduct amounts to fundamental breach, or even to a breach at all.

The resulting uncertainty is the natural consequence of the employer's own strategic approach: They're not getting an answer from the employee because they don't want an answer from the employee, and they're being deliberately elusive as to the contractual characterization of their own actions.

Holding their feet to the fire and telling them that 'termination' or 'employee consent' are the only ways to get out of an ongoing contractual commitment they don't like...would create certainty and clarity in this notoriously fuzzy area of law.

Perhaps more importantly, because employers genuinely believe that they have some entitlement to change the terms of a contract, that seems less oppressive than actually terminating the relationship. When you actually terminate the contract and put a new offer to them for afterward, this may raise a genuine question of the employee declining the new offer.  (This is at least psychologically different from the perception that you're 'changing' the terms and then putting it on the employee to proactively resign if they're not happy.) So to interpret a unilateral change as an ultimatum of "accept this change or else we're terminating your employment" doesn't necessarily capture the employer's actual intentions, and often runs directly contrary to what the employer thinks they're communicating.

Twice Fired

Part of what got me thinking about this was trying to process a case - there's a draft sitting unpublished, that I'll finish shortly, because it sent me down this analytical rabbit hole - where an employer first reduced the employee's pay, then terminated the employee altogether. The interplay between two distinct events that amount to constructive dismissal AND actual dismissal...raises unusual questions.

The court came to the conclusion that the original reduction was a constructive dismissal, which would entitle the employee to damages based on the original rate of pay, less mitigation earnings of the period leading up to the actual dismissal, OR the employee could get pay in lieu of notice flowing from the actual dismissal at the reduced rate of pay.

Let's call this the "greater of" analysis.

On my initial read, I thought that was right. In fact, that precise analysis was something I mused about in an opinion I gave a client earlier this year.  At minimum, I figured, an employer would be unable to reduce its own liabilities by reducing compensation in a separate and prior breach to the actual termination of employment.

Then I got to thinking: Why not both? Wouldn't want double-recovery, of course, but suing for the wage reduction, through an entire reasonable notice period, PLUS suing for reasonable notice at the reduced wage rate, through a full reasonable notice period, quite elegantly puts you in the position of suing for an amount equivalent to your unreduced wage rate through an entire period of reasonable notice. And in the context of an employer making a wage reduction that they simply weren't entitled to make in the first place, isn't that fair?

This covers off the full range of scenarios, where the 'greater of' approach may leave some questionable variations. For instance, imagine a case where I'm entitled to six months' notice, and my employer cuts my wages in half, and I decide to stay in the job nonetheless.  On any theory, I should be able to sue for a top-up over the six month notice period.  But what happens if the employer terminates my employment the day before that six months is up. If you assume that I have to elect one or the other, then that termination at the end of the constructive dismissal notice period - while deeply prejudicial to my interests and legitimate expectations - would not provide me with any additional remedy.

So of the "Implied Notice of Termination" approach solves certain problems that arise from a "greater of" approach.

But on the strict approach, a unilateral pay cut doesn't actually have any impact on the rights or obligations under the contract, even at the end of a notice period.  So the scenario becomes that the employee is entitled to be put back into the situation he'd be in had (a) the unilateral reduction of his wage never happened AND (b) he'd received reasonable notice of termination - therefore, a top-up the wages underpaid prior to termination, then full pay in lieu of notice at his pre-reduction rate following termination.

It seems to me that this is also quite consistent with the compensation principle, and better respects contract principles.

And, quite honestly, I think the paradigm of 'get employee consent or else terminate the existing contract' as a framework for changing existing contractual terms is MUCH easier for employers to grasp and execute than the existing mishmash of treatments for various different kinds of changes.

Instead of the ridiculous exchange I posited earlier in this entry, what we would hope for with an enhanced culture of consent would be more along these lines:

Employer: We'd like you to sign this new contract that reduces your compensation to x.
Employee: No.
Employer: In that case, we're terminating your existing contract effective date y, and offering you a new contract starting the following day at compensation x.

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Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.