An employee that faces a unilateral change to their employment contract may have the right to treat the contract as wrongfully terminated and resign. In these ‘constructive dismissal’ situations, the employee, upon resignation, is entitled to claim damages in lieu of reasonable notice. It is important to note, however, that not every unilateral change amounts to constructive dismissal. The change must affect a fundamental term or condition of the contract.
An employee’s pay is considered a fundamental term or condition of their employment and as a result, a unilaterally imposed reduction in pay may give rise to a constructive dismissal situation. Not every pay reduction, however, amounts to constructive dismissal. The determination of this issue depends on whether there are other significant changes to the employment contract in addition to the reduction of pay as well as the amount of the reduction itself.
Generally speaking, in order for a pay reduction alone to amount to constructive dismissal, courts have suggested that the reduction has to be at least 20% or more of the employee’s total remuneration. A reduction in the range of 14%-17% of the employee’s total remuneration may amount to constructive dismissal, but only if there is an additional significant unilateral change in the terms of employment. These figures, however, are merely guidelines, based on previous court decisions and by no means are absolute rules about when constructive dismissal will arise in cases of pay reduction. Employers and employees alike would be wise to seek legal advice prior to making any employmen decisions relating to a pay reduction.
In addition to base pay or salary, it is important to remember that employees often receive additional forms of compensation as part of their employment contract. This additional compensation may be in the form of benefits like car and phone allowances, stock options, bonuses, etc. The reduction or removal of these benefits, therefore, can give rise to constructive dismissal claims in the same way as a pay reduction alone, depending on such factors as the benefit in question, its value relative to the total remuneration of the employee and its significance in the context of the overall employment relationship.
The unilateral reduction of employee compensation is only one of several ways in which a constructive dismissal situation can arise in an employment relationship. While we may have some general guidelines as to the size of reduction required to give rise to constructive dismissal, there is still an element of uncertainty when it comes to determining whether a particular change to an employment contract amounts to constructive dismissal. This uncertainty naturally makes decision-making difficult for employers and employees alike. Seeking legal advice will help to ensure that each party understands the risks involved in taking a certain course of action and can help ensure that all relevant considerations are weighed prior to making any decision.