The employer is not entitled to materially reduce compensation without it being a constructive dismissal

Joanna McFarlane was both a victor and victim of the COVID-19 pandemic. She began working with her former employer, the Toronto advertising company King Ursa, in March 2019 as its director of analysis and insights. About a year later, COVID hit and the company faced financial challenges, reducing its workforce from more than 40 people down to 10 to ensure its survival.

McFarlane was at first a beneficiary of this and was promoted to VP media and analytics. Shortly thereafter, she was promoted again to executive VP media and analytics, with a salary increase from $220,000 to $300,000 a year.

McFarlane then went on maternity leave, during which time the company’s cost-cutting efforts proved insufficient and it slid further into the red. Twice it deferred McFarlane’s return from leave due to its worsening cash flow and discussed with her the prospect of severance.

Ultimately, King Ursa provided McFarlane with a letter demoting her to her previous VP position and reducing her compensation to $210,000. She then resigned and claimed constructive dismissal.

The company tried to sugar coat the situation by writing that, “There is no executive here that is not needed, valued or wanted. Please do not feel that you are being dismissed.” It let her know that others were being dismissed, and that all executives were taking a pay reduction.

Of course, not returning an employee to their previous position upon their return from maternity leave, let alone reducing their wages, is a violation of both the Employment Standards Act and human rights legislation. But this was a court case, not one before either of those tribunals.

In concluding that there was a constructive dismissal, the court stated: “The fact that the company’s circumstances made the conduct of (the owners) more understandable in real-world context did not excuse them of their legal obligations as an employer. The business had legal obligations. If it cannot afford to keep an employee, it must provide notice or payment in lieu.”

The court found that McFarlane overreached somewhat in the case by arguing that the owner had created a toxic environment, an allegation too readily made by plaintiffs’ counsel these days and which can redound against their clients — particularly when not established, as it puts the reputation of the employer at risk if there is no basis for it.

The court found that the allegation made in this case, which was obviously embarrassing to the owner although he admitted to it, had nothing to do with McFarlane. Justice Akazaki also noted that “companies undergoing financial stress tend to allow anxiety to absorb the atmosphere” but found no grounds to hold that (the owner) made it hard for McFarlane to continue working at King Ursa.

Despite her short length of service of just over three years, the judge awarded McFarlane 12 months’ severance. In particular, he relied upon the lack of comparable employment available to her.

I have always argued that availability of comparable employment should be the most important factor in determining notice/severance because wrongful dismissal arises from the law respecting breach of contract, and the degree of difficulty in replacing the contract is how damages are determined in the event of a breach. But few courts have as explicitly relied upon employment availability as the overriding factor to the extent that Justice Akazaki did here.

The decision is another death-knell to those who attempt to emphasize length of service as a determining factor. That has never been the law. That confusion has lead to too many misleading severance formulas, as well as being a common misconception.

The employer argued that McFarlane had not fulfilled her obligation to mitigate, i.e., look for other employment, in attempting to reduce the 12 months awarded. Although McFarlane’s job search documentation was not permitted to be introduced as it was submitted too late to the court, the fact that McFarlane took a lower paid consulting assignment marketing wine after only a month convinced the court that she was serious about replacing her income.

Of importance to all employers and lawyers acting for them are the court’s words:

“The employer bears the burden of proving the employee failed to mitigate, including that they could have procured other employment of an approximately similar kind. The party in breach has a high onus, because they are demanding positive action from the sufferer of the breach. Any reduction of the severance requires cogent evidence proving not only the lack of effort but also the ability to secure comparable employment.”

Turning to additional damages, Justice Akazaki noted that, whatever King Ursa’s economic needs might have been, there was no economic basis for the demotion, adding that the demotion “struck an employee’s vulnerability as a person who had built her professional identity and status through thought and industry.”

The court rejected the allegation of discrimination based on gender or because she took a maternity leave, although the fact that she was returning from one was a defining fact in its attempt to redefine her employment terms:

“The circumstances of her isolation from the company during her extended maternity leave contributed to a need for heightened sensitivity and professionalism in the renegotiation of her compensation or severance based on the company’s undeniably poor financial performance. So, for the purpose of moral damages, the analysis was based on her handling not on discrimination.”

Since the conduct was not malicious no punitive damages were awarded, but McFarlane was awarded $40,000 in moral damages, which the court defined as being in the mid-range of such awards because of the financially unnecessary demotion.

It was clear that no moral damages would have been awarded if only her salary had been cut, although it still would have been a constructive dismissal.

In the case of Doran v. OPG, in which I acted, every other employee but Doran accepted Ontario Power Generation’s changes, just as the other senior executives at King Ursa accepted a compensation reduction. But, as in Doran, the employer is not entitled to materially reduce compensation, regardless of the rationale, good faith or its acceptance by others, without it being a constructive dismissal.