Supreme Court of Canada Finds Constructive Dismissal where Administrative Suspension is Not Justified and Reasonable

March 17, 2015

The Supreme Court of Canada has overturned the New Brunswick Court of Queen’s Bench and the New Brunswick Court of Appeal in a new landmark constructive dismissal case: Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10.

Potter was the executive director of the New Brunswick Legal Aid Services Commission (the “Commission”).  Approximately mid-way through the seven year contract term, in the spring of 2009, Potter and the Board of Directors (the “Board”) began to negotiate a buyout of the contract.  In October 2009, before an agreement was reached, Potter’s physician advised him to take time off work for medical reasons for a period of one month.  This medical leave was extended until January 4, 2010 and later to January 18, 2010.  The Board unilaterally decided on January 5, 2010, without informing Potter, that if a buyout agreement was not reached by January 11, 2010, it would request that the Lieutenant-Governor in Council revoke Potter’s appointment pursuant to s. 39(4) of the Legal Aid Act, RSNB 1973 c I-13 (the “Act”).

On January 11, 2010, the Board requested the dismissal and forwarded a letter to Potter advising him not to return to work until further notice.  A replacement was designated, but Potter’s wages continued to be paid.  Despite his request, Potter was not provided with reasons for his suspension.  On March 9, 2010, Potter commenced a legal action claiming constructive dismissal.

The trial judge found that the Commission had the statutory authority to place Potter on an administrative suspension with pay and that this was not a constructive dismissal despite its indefinite term.  The Court of Appeal upheld that decision.

On appeal, the Supreme Court of Canada (the “Court”) found that the Commission had constructively dismissed Potter.  Drawing largely on Farber v. Royal Trust Co., [1997] 1 S.C.R. 846, the Supreme Court of Canada discussed the two forms of constructive dismissal:

Branch 1:

Was there a breach of an express or implied contract term?

Step 1 –   Was there a unilateral change by the employer that constituted a breach of (ie. a detrimental change to) the employment contract?  To be a unilateral change, there must not be an express or implied term that provides the employer with the authority to make the change and the employee must not consent or acquiesce to it.

 

Step 2 –  Did that breach substantially alter an essential contract term? While considering only what was known by the employee at the time of the breach and what ought to have been foreseen by a reasonable person in the same situation, would a reasonable person at the time of the breach and in the same situation as the employee feel that the essential contract terms were being substantially changed?

 

Branch 2:

Was the employer’s conduct such that a reasonable person would conclude that the employer no longer intended to be bound by the terms of the contract?  For this branch, the employee need not point to an actual specific substantial change that on its own constitutes a substantial breach.  Instead, a course of conduct that does evidence such an intention amounts cumulatively to an actual breach.
Given that a particular act was at issue, that being the administrative suspension, the former branch applied in this case.  The primary burden to establish constructive dismissal rests with the employee, but where an administrative suspension is at issue, the burden shifts to the employer to show that the suspension was justified and reasonable.  A breach is established if the employer fails to do so and the burden of proof then returns to the employee for the second step of that test:  proving that the breach was a substantial alteration to an essential contract term.

As per the first step of the first branch, the Court considered whether the suspension was a breach of the employment contract.  In order to make such a determination, it considered whether the suspension was a unilateral act: “If an express or an implied term gives the employer authority to make the change, or if the employee consents or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach.”  The Act did not expressly provide the Board with the power to suspend for administrative reasons, Potter neither consented nor acquiesced, and the Court determined that there also was no such implied grant of authority.

The Commission had argued that the correct question to be considered is not whether it had authority to suspend Potter but whether it had a duty to supply him with work given that he continued to be paid.  The common law sets out that “the obligation to keep an employee retained and employed [does] not necessarily import an obligation on the part of the employer to supply work” with two recognized exceptions: (1) where there is a benefit to the employee from the performance of the work and (2) where the employee’s remuneration is on a commission basis.  The Commission argued that these exceptions did not apply in this case; however, the Court found that Potter derived a reputational benefit from the performance of his work and opined that even if these exceptions do not apply in a given instance, employers do not have discretion to withhold work from their employees without justification or in bad faith.  Although the Court did not proceed to offer a rigid framework for determining whether an administrative suspension based on implied authority is wrongful, the Court indicated the overriding question is whether the suspension was reasonable and justified.  Legitimate business reasons are stated to be a requirement and other relevant factors include the duration of the suspension, whether the suspension is with pay, and the good faith of the employer.   Additionally, justification requires forthrightness with the employee.  In this case, Potter did not receive any reasons for the suspension whatsoever, he was replaced during his suspension, the suspension was for an indefinite period, and the Board attempted to have him terminated without his knowledge, therefore the Commission failed to establish that the suspension was reasonable or justified.

As for the second step of the first branch, the Court considered whether a reasonable person in the same situation as Potter would have felt that the essential terms of the employment contract were being substantially changed.  The Court concluded that it would be unlikely that a reasonable employee would not feel that an employer’s “unreasonable and unjustified acts evinced an intention no longer to be bound by the contract.”

The Commission’s unilateral act constituted a breach of Potter’s employment contract and substantially changed the essential terms of that contract.  The test for constructive dismissal was met and Potter was entitled to damages.  The provisional damages calculated at trial were upheld, except Potter’s pension benefits were not to be deducted because they were not intended to compensate him for being wrongfully dismissed, as per IBM Canada Limited v. Waterman, 2013 SCC 70.

Lessons for Employers

The Supreme Court of Canada in this case has further clarified the law of constructive dismissal.  In the absence of an express legislative or contractual right of an employer to suspend an employee for administrative reasons, the suspension must be justified and reasonable even if the employee continues to be paid.  There must be legitimate business reasons for the suspension that are communicated to the employee, and even then the reasonableness of the suspension will be considered, looking at such factors as the duration of the suspension, whether the employee is paid throughout, and whether the employer is acting in good faith.

A full copy of the decision can be found at the following link:
Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 (CanLII)

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