Redefining Constructive Dismissal, Chapter Four: Consideration and Conscionability

In Chapter Three, I suggested that actually changing the employment contract required an employer to either unambiguously terminate it, or obtain unambiguous employee consent.

Professor David Doorey rightly called me out on this: The latter threshold is too low, missing the requirement for 'consideration'. I'd suggest that a proper understanding of how an employment contract gets changed in the 21st century also means recognizing that the change has to be made in good faith (which is relatively new), and conscionably (which isn't new but until recently was a pretty narrow issue).

The concept of consideration is one of the fundamentals of contract law. A contract requires mutual promises to be enforceable at law. If you offer to mow my lawn all summer for free, and I say "Sure", I probably can't hold you that.  But if you offer to mow my lawn all summer for a nickel, and I say "Sure", then I suddenly owe you a nickel, and you're required to mow my lawn. Consideration doesn't have to be of any particular value; it can be nominal or symbolic.

In employment law, this concept has developed into a requirement for 'fresh consideration' - that an existing employee, already having secured the rights and remedies associated with the employment contract, must receive something new in exchange for a change to the contract.

Many contract clauses, and termination clauses in particular, have died gruesomely on the altar of fresh consideration. Employers have argued that forbearance from firing is enough: They signed it, and so we didn't terminate the relationship, and therefore that's consideration.

This isn't entirely uncontroversial - there's a pretty decent dissent from Justice Slatter in Globex v. Kelcher on the subject - but it's still a fairly well-established principle...and, within certain limits, I would suggest, a sound one.

Suppose you have an employee entitled to three months' notice under a contract, who earns $1000/wk. The employer puts a revised contract to them that changes nothing except for reducing their pay to $800/wk, effective immediately.

In signing that contract, if it were enforceable, the employee gets nothing from the employer, and loses much.  If the employee keeps working, they lose 20% of their wages.  The employer remains entitled to terminate the employee at any time - including a millisecond after the signing of the contract - but instead of a notice period worth $13,000, now it's only worth $10,400.  The employer has promised absolutely nothing of value, even nominal value, in exchange for the employee's valuable concessions.

So if even a wage change on an express bilateral agreement lacks consideration to effectively change the contract, how can acquiescence to a unilateral change ever do more?

What Should Consideration Look Like?

Consideration can be nominal, and for many types of contract changes - such as substantial changes to the nature of the position, reporting relationships, location of work, and others that don't have a direct pecuniary impact - a nominal signing bonus (a dollar? a hundred dollars?) is almost certain to do the trick from a technical perspective.

Whether or not a nominal signing bonus can constitute consideration for a substantial pay reduction...is not something I can speak to with certainty.

While mirrored nominal consideration isn't totally unheard of in new contracts - a mutual promise by each party to pay the other $1, just to be clear that there's consideration - there's a legitimate question as to its effectiveness. A promise to exchange fungible assets of the same kind (including money) at the same time, effectively creates mutual obligations that entirely cancel each other out, and doesn't seem to establish a real obligation at all.

In a typical employment relationship, at any given time there are likely to be all sorts of unvested entitlements of the employee pertaining to the mutual obligation to give notice.  Neither party is usually entitled to end the relationship without notice, which means, that - at any given point in time - there's an expectation on both sides that the employee will continue to earn wages at the current wage rate for a period of time.

So in the above-noted scenario, as the employer, can I have you sign that contract for a 20% pay cut, give you a $100 bonus now, and then immediately terminate you and hand you a $10,400 cheque instead of the $13,000 cheque I'd have had to give you otherwise?

Consideration may (or may not) be a problem with that. Probably not the only problem, though, and probably not the problem we want to rely upon to get around the substantive unfairness of that approach - because whether or not a $100 signing bonus amounts to 'consideration' for a substantial pay cut, a peppercorn almost certainly would be.  The doctrine of consideration doesn't require that it be of equivalent value to the promises you're making.  For that, we look to other solutions.

But there are other possible forms of consideration, too.

There's one dated Ontario case, Techform, where continued employment was found to be fresh consideration, but subsequent decisions interpreted the outcome as fact-driven - that, in fact, there was an implicit promise from the employer not to terminate employment for a reasonable period of time after the contract was signed. And they didn't.

While I can be critical of Techform, that approach creates a useful rubric to think about:  If, in the above scenario with the 20% pay cut, I expressly promise not to terminate your employment with an effective date less than four months out from the signing date...that's a meaningful promise that at LEAST preserves your unvested entitlements under the existing agreement.

I'll call this structure a "Techform promise" - where you're securing at least a long enough period of continued employment that the guaranteed dollar value of signing the renegotiated contract, for the employee, is higher than the entitlements under the agreement were it immediately terminated.

And finally, of course, if there's an actual termination of the existing agreement, then a new offer of employment to become effective after the expiration of the termination notice period will not need 'fresh' consideration; in that case, continued (or renewed) employment actually is consideration.

In the case law, 'fresh consideration' has carried a lot of water for fairness concerns. New hires who accept an offer and quit their old job, only to have a new contract with onerous restrictive covenants put to them afterward, as in Alishahh. Such a person is, when that new contract is put to him or her, in the power of the new employer, with little choice but to agree to the terms. Or, conversely, long-service employees with meaningful entitlements to reasonable notice, asked to sign contracts that severely limit their existing notice entitlements upon termination, with no valuable compensation paid for it.

And yet, given the fundamentally technical nature of consideration, the undeniable fact is that we're fighting exploitative employer tactics with technical 'gotcha' tactics: We know that there's something unfair and unsatisfying about an employer being able to engage in such an approach, and we're finding technical procedural defects unrelated to the substantive equities, in order to drive a result that seems 'fair'. For all the substantive reasons why it would have been unfair to hold Mr. Alishahh to the terms of the contract he signed after being hired, the actual reason he wasn't held to them was for want of a fresh peppercorn in the new contract.

A sufficiently sophisticated employer, or one with legal advice, will be aware of the requirement for fresh consideration, and can easily satisfy it without meaningfully enhancing the fairness of the contract or ameliorating our concerns about the employer's tactics in getting the contract signed.

Good Faith and Unconscionability

There are evolving doctrines in contract law of good faith obligations and unconscionability. If we're worried about a scenario where an employer might weaponize a contract and its bargaining power to deprive the employee of reasonable entitlements, these are the right areas to look, rather than to technical doctrines like consideration, where a sophisticated employer can work around them.

In the scenario above where I get you to accept a 20% pay cut in exchange for a peppercorn, then immediately turn around and dismiss you on notice at your reduced rate of pay...that kind of manipulation, if deliberate, would almost certainly run awry of Bhasin good faith obligations.

But even if it's not deliberate...suppose that I go back to my office after you sign, do some number crunching, and discover that - now that your termination entitlements are reduced - the prudent business decision is to terminate your contract...it still seems problematic.

Putting such a contract to an employee is invariably an exercise of the employer's significant bargaining power. Express or implied, there's a job security threat underlying it: If you don't sign this contract, we might just fire you. However - and I can't tell you how many times I've pointed this out to employees - there's usually no guarantee of "If you DO sign it, we WON'T fire you in any given period of time."

And that's a problem - when it's understood by all involved that you're signing a renegotiated contract, giving away vested or unvested entitlements under the existing contract, to avoid a party standing on a certain right, and yet that party is still unwilling to cede any part of that right to secure your signature, that's an oppressive use of a bargaining advantage.

So your employer comes to you and says: "We're cutting your pay in half, effective immediately, and here's a peppercorn...and if you don't sign, we're just going to terminate your employment...and if you do sign, we reserve the right to terminate your employment anyways." You're signing away valuable entitlements, you're not actually getting anything for it, and you're actually making it easier for the employer to make the termination decision you're trying to convince them not to make...but most employees will sign it anyways.  Without at least getting a Techform promise, it's an irrational decision - if the employer isn't going to terminate you in a way that leaves you worse off for signing the contract, why wouldn't they at least make that promise? If they are going to do so, why on earth would you sign it? What stops the employer from relying on that same leverage AGAIN to secure EVEN MORE concessions? - but most employees will take the (non-binding) hope that maybe the employer will keep them around if they play ball, and will meaningfully compromise their contractual rights in exchange for that hope.

The Uber framework for unconscionability would seem to apply - it's improvident of an employee to sign away vested or unvested rights under an existing employment agreement without some enforceable assurance that the employer won't unilaterally exercise its contractual rights in a way that leaves the employee worse off for having signed it. And employees only sign it - and they will sign it - because of the significant imbalance in bargaining power.

I have cautioned employer clients in the past that, after securing an amendment to a contract, terminating the relationship at a time that leaves the employee net negative for having signed the new agreement...is a BIG RED BUTTON. We don't necessarily have a clear analytical framework for the courts to find a way around the employer's reliance on the contract, but I'd wager heavily that they'd find one.

There are really a couple of ways around this:  Put a Techform promise into the agreement itself, OR set an effective date that is on or after the end of the applicable notice period for termination.

Combined with fresh consideration, of course.

And, outside of cases where the terms being asked of the employee are objectively unfair, this is a fair compromise:  An immediate pay cut, if agreed to by the employee, has to come with a near-term guarantee of job security - you can't pressure them to take a pay cut on an implied threat of dismissal...and then STILL dismiss them.  Or else you go to the table fully willing to pay out their entire entitlements under the existing contract of employment.

The Hard Turn

This is all, of course, entirely inconsistent with the status quo. Right now, courts are prepared to read the contract as being effectively amended by a unilateral change by the employer, simply on the basis that the employee continued to fulfill his/her role under the original contract, without any requirement for unambiguous assent or consideration.

And so employers would be unimpressed by such a transition. The current culture of unilateralism, after all, is well-entrenched.

Of course, it's also insanely complicated.  You can't unilaterally reduce their wages, except that you can so long as you don't do it by more than that threshold, and even if you do it by more than that threshold, your worst case scenario is that they sue you for a top-up through a reasonable notice period. You can't change fundamental terms and conditions of the contract without risking that they might quit and sue, except that they can't quit and sue unless there's an environment of hostility or embarrassment.  And if they don't quit and sue within a reasonable period of time in response to your ongoing breaches, then they lose the right to quit and sue in response to your ongoing breaches, or maybe your ongoing breaches aren't breaches at all...?

Oh yes, AND employers also have the choice of giving actual termination of employment, and offering new terms instead, OR of securing employee consent to amendments.

Employers have this suite of unilateral, bilateral, and hybrid options for changing contracts, and even they're not particularly thrilled about the complexity and uncertainty of it all, but all the uncertainty ends up on the shoulders of the employee, where the employer has chosen the options - often with help of counsel - designed to most significantly limit the employee's options to respond.

As I mentioned earlier, the messaging on this transition would be relatively easy: You can't unilaterally change the terms and conditions of the contract - either get them to agree (with consideration), or terminate the contract and offer a new one.

There are two core areas where employers would need to make uncertain assessments up front: Firstly, they need to navigate the line between exercising and exceeding the discretion conferred upon the employer as part of the employment agreement. Secondly, they need to assess the notice period owed when deciding how to terminate the contract, or how to make a Techform offer.

Scope of Management Rights

To be fair, it's kind of ridiculous that we don't have a meaningful body of jurisprudence drawing this line in non-union environments. So much jurisprudence focuses on what amounts to a fundamental breach, and basically none of it addresses what constitutes breach simpliciter.

There's some 'just cause' case law dealing with insubordination: What can an employer demand of an employee, and then fire them for a refusal to do?

The Echlin and Certosimo text on just cause defines the test for insubordination in a certain manner, and the closest it comes to engaging 'scope of work' issues are in a requirement in step 6 that the directive be "lawful and reasonable", and its seventh and eighth steps:

7. Whether the employer’s instructions, orders, policies or procedures were necessary to the fulfillment of the employer’s objectives or pertained to a matter of substance; and

8. Whether the employee’s single or isolated act of disobedience justified dismissal because it was of such a nature as to show, in effect, that the employee was repudiating the employment contract, or one of its essential terms.

Alberta's case law shapes the test slightly differently, including that the directive came within the scope of the employee's duties.

But even this case law doesn't iron out the rough edges of what the scope of the employee's work entails.

For many types of change, it shouldn't be rocket science. Unfavourable compensation changes are almost certainly outside management discretion. Some slight factual and legal grey areas in the context of benefit plans, I suppose.

Breaches of the duty to treat employees fairly, with civility, decency, respect, and dignity - even if not rising to the level of a constructive dismissal - would be actionable as breach simpliciter if damages could be shown to flow therefrom. (Something similar could be said of the breach of the duty of good faith and fair dealing, but since that only technically arises in contexts surrounding termination of employment, whether it's actionable as a standalone breach is probably an academic question.)

For changes to terms expressly written into a contract, that will usually be outside managerial discretion. Sometimes the contract expressly reserves a management right to make a change, but that may or may not help the analysis.  (This is likely complicated. In most contexts, there's a general expectation that the employer has some authority, for example, to schedule hours. I would suggest that it is likely an implied term of the employment contract that employees must make themselves available, upon reasonable notice by the employer, to work such hours as are reasonably required by the employer, within the understood scope of the business and role. If the role is understood - whether by reason of the posting itself, express discussions between the parties, or simply an industry standard - to be a full-time job for regular business hours, a part-time night shift, or anything in between, then those terms and categories may not have specific legal meanings, but they will inform the reasonable expectations of the parties.  A contract can be used to expressly inform the expected shifts, overtime availability, etc., but anything that's subject to 'managerial discretion' isn't really a fixed term of the contract...and if the contract fixes hours without reserving managerial discretion, then it likely displaces any residual entitlement upon the employer to change it.)

For many changes, it will be a matter of scale: An employer shifting its hours from 8:30-4:30 to 9-5 may be within its discretion.  But if an employer changes hours from a day shift to a night shift, if the job was not previously understood to entail shift work? Probably not.  An employer shifting its location a few km down the road may not need to amend contracts for that...but an employer relocating an operation to a different city altogether certainly would. Same things with directed duties. Most jobs don't have comprehensive job descriptions, so for an employer to direct an administrative assistant to attend to the reception desk periodically is probably okay...but transferring an administrative assistant to become a full-time receptionist would probably require something pretty express in a contract.

Do these 'matter of scale' changes sound too fuzzy? Well, funny thing...this part isn't that different from current considerations of 'fundamental breach'. Or possibly not different at all: The employer changing duties, hours of work, or location, within the scope of express or implied management discretion, usually (depending on the specifics of the contract) isn't a breach at all until it crosses the line and goes to the heart of the contract, at which point it becomes a repudiation.

If there IS a grey area between fundamental breach and breach simpliciter for these changes, it is one that is unlikely to engage damages on any meaningful scale, barring extraordinary circumstances that are likely better addressed in a human rights framework anyways. (A modest change in regular hours, for example, can have an impact on a parent's ability to secure childcare arrangements. However, for that reason, an employer changing hours may engage a duty to accommodate, which is, broadly speaking, a more appropriate framework for any constraints upon an employer's ability to schedule within reason.)

In practice, if you don't get employee consent to a change that (a) doesn't rise to a constructive dismissal, (b) is outside the scope of management discretion, and (c) is non-monetary in nature...you're most often going to end up in a scenario where the employer is breaching the contract by imposing different requirements, the employee is tolerating that breach without incurring damages by meeting those different requirements...and that situation could persist indefinitely. The only real problems arise in (a) the rare cases where employees can trace recoverable losses from an employer's breach of a non-monetary term or (b) the cases where the employee rolls the dice and refuses to comply with the direction that exceeds managerial discretion.

But conversely, for terms other than compensation, taking a 'when in doubt, get employee consent' approach isn't all that onerous for employers with decent HR practices in the first place. Offering a modest signing bonus, or tying it to an annual raise, is pretty straightforward, and if it's really not unduly onerous for the employee to accept, why wouldn't they? Moreover, for many employers, it's a routine practice to put a new contract in front of the employee with every raise and bonus.

Assessing Your Reasonable Notice Period

If we were to adopt an analysis along the lines of what I've proposed here, that a change that effectively reduces compensation, effective immediately, should at least come with a promise of continued employment for long enough that the employee isn't signing away existing contingent entitlements in the power of the employer...then really, in a case where the employer in good faith wants to keep the employee, the resulting uncertainty is really not particularly onerous.

Or, alternatively, you give notice of termination effective as at the end of the applicable notice period, and make a new offer afterward.

The problem here is that, even with good legal advice, the applicable notice period is an inexact science. There's always a range.

There are silver linings on that problem, though:

Firstly, with Techform offers in particular, it's easy to err high on the side of caution. As long as you don't actually need to keep 'dismissal' on the table in the near term, it costs nothing to extend out the 'no dismissal' period longer.

With actual notice, it's tougher - the reason you're making the changes in the first place is likely because the status quo isn't working. But it's still a reasonable approach in many cases.

To be clear, this isn't hypothetical, even under the status quo: "Terminate on notice and offer a new contract on new terms" is a pretty realistic option, especially when looking at a corporate restructure that will result in demotions or other changes to duties, and I have worked with employer clients to implement such strategies.

Secondly, where 'actual notice' is concerned, courts can be a bit deferential in close cases. If an employer has acted reasonably and in good faith, if the actual amount of notice is arguably within the range, then a court is unlikely to tweak it to move it to a different point in the range.

So the point is that these uncertainties aren't extraordinary, and they aren't even all that novel.

The Bottom Line

So, to reiterate and refine the core point from Chapter Three, an employer seeking to change the terms and conditions of an existing contract should be expected to obtain employee consent, to provide valuable consideration, and to ensure that the amendment is on terms that are conscionable and consistent with public policy.

And, of course, all of this really is very basic contract law in the first place, even if employment law has fallen out of step with it.

*****

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.