CONSTRUCTIVE DISMISSAL

Are You At Risk of a Constructive Dismissal Class Action?

May 2012

Class actions turn relatively minor individual wage claims into multimillion dollar liability risks. So it’s easy to see why employers are so spooked out about them. The one saving grace is how hard it is for employees to get their cases “certified,” i.e., approved by the court as a class action. But this hasn’t discouraged employees from trying. So far, most would-be class action wage cases have focused on overtime. But last year, a lawsuit in Ontario opened a new front in the battle: constructive dismissal. In April 2011, employers scored a major victory when an Ontario court nixed a constructive dismissal case as a class action. But that was only Round 1. Round 2 was decided by an appeals court on April 4, 2012. Here’s what happened.

Click here to see how vulnerable employers in your province are to the risk of a constructive dismissal class action.

THE KAFKA CASE

In 2007, Allstate insurance told its agents of plans to implement major changes to its business model over the next 2 years. Neighbourhood and locally managed offices would be consolidated into larger, central locations under corporate control; the compensation scheme would become more variable and based on individual incentives. 102 agents who resigned their positions claimed the changes amounted to constructive dismissal and filed a class action lawsuit. Allstate denied the claims and challenged the agents’ right to assert them as a class action. The Ontario Superior Court ruled that the claims had to be brought individually and not as a class action; so the employees appealed.

The Divisional Court upheld dismissal of the case as a class action. Not just any case can be brought as a class action. Among other things, the plaintiffs, or persons bringing the lawsuit, must persuade the judge that the claims have enough in common to warrant trying them together in a single proceeding. The lower court’s April 2011 ruling was that the Allstate agents’ failed to prove commonality in this case; and that ruling was correct, said the Divisional Court.

Explanation: To prove constructive dismissal, the court explained, employees must show that the employer made “unilateral and fundamental changes” to the terms of employment without giving employees reasonable notice. In essence, they must show the employer tore up the previous contract and substituted less favourable terms of its own making.

Is that, in fact, what Allstate had done? A trial would be necessary to answer that question, said the court. During that trial, the court would have to look at the effect of the changes on each individual agent. The court acknowledged that the changes were company-wide and applied to all agents. However, it reasoned, they affected each agent differently depending on their previous arrangement and where they worked. Because the issue of whether the change was “fundamental” to the employment relationship had to be dealt with case-by-case, the agents couldn’t bring their lawsuit collectively in a class action, the court concluded. The Divisional Court agreed and tossed out the appeal, leaving the agents’ 2 options: appeal again or give up on the class action and sue individually [Kafka v. Allstate Insurance Co. of Canada, [2012 ONSC 1035 (CanLII), April 4, 2012].

IMPACT ON YOU

It would be premature to celebrate Kafka as the death of the constructive dismissal class actions. For one thing, the case may not yet be over. If the Allstate agents still have the intestinal fortitude, there may yet be a Round 3.

More importantly, Kafka isn’t binding outside of Ontario. And even within Ontario, courts in other constructive dismissal cases could seize on differences in fact patterns to find commonality and certify the case as a class action.

If you’re from BC, you have less cause for concern. The reasons for this are fairly complicated but stem from a 2008 BC case called Macaraeg v. E Care Contact Centers, [2008] B.C.J. No. 765, May 1, 2008 essentially finding that no ESA claim could be brought as a class action in BC. Although it’s not an absolute bar, Macaraeg would make constructive class actions in BC the longest of long shots.

3 WAYS TO PROTECT YOURSELF

The primary strategy for protecting your organization is to ensure that no employee is ever in a position to bring a constructive dismissal claim against you—class action or individual. There are 3 strategies you can use to meet this goal:

1. Secure Employee Agreement to Changes

At heart, constructive dismissal is a violation of the employment contract. The sin the employer commits is unilaterally changing the agreement with the employee. To the extent that employees know and agree that such changes will or can happen when they take the job, they’ll have a harder time winning a constructive dismissal lawsuit. So let employees know up front that certain aspects of the compensation package or other employment terms are subject to change and not guaranteed to continue.

2. Provide Consideration for Take-Backs

Getting employees to accept unfavourable changes to the terms of their employment is better than imposing changes unilaterally. But be careful. Employee acceptance, even if it’s put in writing, is generally not enough. Under contracts law, such concessions and changes are enforceable only if the employee receives consideration, i.e., something of value, like a bump in pay, extra time off or other benefit, in exchange. That’s why you should always try to provide a quid pro quo any time you take something back from an employee.

3. Notify Employees of Changes as Far in Advance as Possible

Notifying employees in advance of unfavourable changes to their employment can also minimize the risk of liability for constructive dismissal. The more notice employees get, the less they can claim they were waylaid by the change. “A fundamental change that is accompanied by reasonable notice is not constructive dismissal,” according to one court [Fellowes-Strike v. Co-operators Group Ltd., [1998] O.J. No. 1714, April 16, 1998].

Be mindful that giving notice of a pay change doesn’t automatically enable you to avoid liability especially if the employee expressly objects to the change. For example, an employer notified an employee of a cut in severance from two years’ to 30 weeks, the minimum required by law. An Ontario court ruled that the employer couldn’t unilaterally change such a pivotal contract term even with advance notice, noting that the employee had continuously objected to the change and thus the employer was bound by the terms of the original agreement. The employer appealed but the Supreme Court of Canada refused to hear the case [Wronko v. Western Inventory Service Ltd., [2008] S.C.C.A. 294, Oct. 9, 2008].

Conclusion

For the time being, the constructive dismissal class action is not a big threat. But that can change. When and if it does, we’ll let you know. In the meantime, you need to concentrate on managing the risks of those old fashioned constructive dismissal lawsuits filed by individual employees. Although not as ruinous as a class action, individual constructive dismissal claims are still costly and damaging to morale and reputation. More importantly, unlike the class action, the individual constructive dismissal claim happens all the time. The good news is that by preventing individual constructive dismissal claims, you also prevent employees from filing them collectively in a class action.

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