“An Indefinite Suspension Coupled with the Employer’s Failure to Provide Reasons to an Employee Equals Constructive Dismissal”: The Supreme Court of Canada Rules

In the recent decision of Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10, the Supreme Court of Canada [“SCC”] clarified several important rules pertaining to the law of constructive dismissal and administrative suspensions. This decision signifies a number of victories for employees who have been indefinitely suspended from their employment, and further restricts the employer’s ability to avoid their common law obligations in cases where the employment relationship comes to an end.

First, the SCC reaffirmed that there is no implied grant of power to suspend. An administrative suspension will amount to constructive dismissal, unless the employer establishes business justification. Interestingly, the SCC pointed out that in cases of administrative suspension, business justification will be difficult to establish where the employer has failed to give an employee any reason for the suspension.

Second, the SCC clarified that constructive dismissal may be established not only on the basis of a sufficiently serious breach of the essential term of the employment contract, but also by employer conduct, which demonstrates the employer’s lack of intention to be bound in the future by the important terms of the contract.

In such cases, an employee who is claiming constructive dismissal is entitled to rely on the employer’s conduct up until the time the employee accepts repudiation and sues for constructive dismissal, even if the employee was unaware of such an employer’s conduct at the time of constructive dismissal.

The SCC also clarified that pension benefits should not be deducted from the damages awarded in cases of wrongful termination, because pension benefits are not intended to compensate the employee in the event of his or her being wrongfully dismissed.

The Facts

David M. Potter (“Mr. Potter”) was appointed as the Executive Director with the New Brunswick Legal Aid Services Commission (“Commission”) for a seven-year term. In the first half of the term, the relationship between the parties deteriorated and they began negotiating a buyout of Mr. Potter’s employment contract. Mr. Potter then took a sick leave before the matter was resolved. Prior to Mr. Potter’s return from sick leave, the Commission wrote a letter to the Minister of Justice recommending that Mr. Potter’s employment be terminated for cause. Mr. Potter was unaware of the letter at the time. The Commission then advised Mr. Potter that he was not to return to work until further direction from the Commission. The Commission suspended Mr. Potter’s employment indefinitely with pay and delegated his powers and duties to another person. The Commission has also refused to provide reasons for suspension to Mr. Potter. Eight weeks after the Commission’s instruction not to return to work, Mr. Potter commenced litigation claiming constructive dismissal. The Commission took the position that by commencing litigation, Mr. Potter had voluntary resigned.

Lower Courts’ Decisions

Both the trial judge and the Court of Appeal found that the suspension did not amount to constructive dismissal. Therefore, when Mr. Potter brought an action for constructive dismissal, he essentially repudiated his contract of employment.

The trial judge described the test for constructive dismissal as “whether an objective observer in Mr. Potter’s situation could reasonably conclude that at the time of suspension the commission had intended to remove his duties from him permanently.” The trial judge noted that this question should be determined only in light of what MR. Potter knew of the Commission’s actions at the time of the alleged constructive dismissal. At the time of his suspension, Mr. Potter did not know about the Commission’s letter to the Minister of Justice recommending his termination for cause. As a result, Mr. Potter could not rely on this information to establish that the Commission intended not to be bound by the employment contract in the future. Therefore, it could not be concluded that he was constructively dismissed.

The Court of Appeal disagreed with the trial judge’s reasoning that determination of constructive dismissal should be limited only to the facts that were known to the employee at the time of the alleged constructive dismissal, but noted that this error was harmless. The Court of Appeal noted that the test for constructive dismissal in cases of administrative suspension should be wither or not the suspension constitutes a substantial change to an employee’s contract of employment. Also, the change must be unilateral and not warranted by the express or implied terms of the contract. In other words, if the employer establishes business justification for the change (i.e., suspension) , the constructive dismissal claim will not be made out. In order to asses a business justification, the Court of Appeal relied on the following factors set out in Delvin v NEMI Northern Energy & Mining Inc., 2010 BCSC 1822 [Devlin]: (1) the duration of the suspension; (2) whether the replacement has been appointed; (3) whether the employee continued to be paid and receive benefits; (4) whether the is evidence of the employer’s intention to terminate the employee; and (5) whether the employer suspended the employee in good faith (i.e., for bona fide business reasons). The Court of Appeal concluded that although the indefinite duration of the suspension weighed in favour of a finding of constructive dismissal, it did not trump the other factors, all of which supported the conclusion that Mr. Potter had not been constructively dismissed.

The SCC Analysis and Decision

The Supreme Court of Canada disagreed with both the trial judge and the Court of Appeal.

The Supreme Court clarified that constructive dismissal can take two forms: (1) when a single unilateral act of the employer breaches an essential term of the employment contract; and (2) when a series of acts by the employer, taken together, show that the employer no longer intends to be bound by the contract.

In order to establish constructive dismissal, i.e., that the employer has breached a certain term which is essential to the employment contract, the burden is on the employee to demonstrate that the employer has unilaterally changed a certain term contract. In cases of administrative suspension, the employee must show that he or she did not consent or acquiesce to the suspension either through an express or implied term of a contract.

The burden then shifts to the employer to provide business justification for the suspension. Business justification can be established in cases where an express or an implied term gives the employer the authority to make the change (i.e., to suspend the employee), or if the employee consents or acquiesces to it.

After a careful overview of the tests for business justification outlined in previous decisions in Delvin, Cabiakman v Industrial Alliance Life Insurance Co., 2004 SCC 55, and Reininger v Unique Personnel Canada Inc., [2002] OJ No 2826, the SCC refined the test for establishing business justification. Accordingly, business justification will be established if the employer can prove the following: (1) that the employee acted in good faith when suspending the employee; and (2) that the employer had legitimate business reasons for suspension. The Court noted that legitimate business reasons constitute a requirement for a finding that an administrative suspension based on an implied authority to suspend is not wrongful. Other than in the context of a disciplinary suspension, an employer does not, as a matter of law, have an implied authority to suspend an employee without such reasons.

Further, the Court noted that the administrative suspension must be in good faith. This means that an administrative suspension cannot be found to be justified in the absence of a basic level of communication with the employee. At a minimum, acting in good faith in relation to contractual dealings means being honest, reasonable, and forthright. The Court found that the employer acted in bad faith by refusing to provide reasons to Mr. Potter for his suspension and therefore failed to establish business justification for the suspension.

Nonetheless, the Supreme Court also noted that in cases of administrative suspension, the test for constructive dismissal necessarily requires a slightly different approach than in other constructive dismissal cases. Where an employee has been administratively suspended, the employee is not required to point to an actual specific substantial change in compensation, work assignment, or so on that usually amounts to a substantial breach in other constructive dismissal cases. Where the administrative suspension is at issue, the focus is on whether a course of conduct persued by the employer evinces an intention to no longer be bound by the contract. A course of conduct that does evince such an intention amounts to a constructive dismissal. The test here is whether or not in light of all of the surrounding circumstances and viewed objectively by a reasonable person in the position of the employee the employer’s conduct shows that the employer no longer intends to be bound by the terms of the employment contract.

The SCC emphasized that the test to determine whether or not the employer intended to be bound by the terms of employment contract necessarily requires consideration of all the employer’s actions at the time the employer suspended the employee, including those actions that were not known to the employee.  Accordingly, the fact that Mr. Potter did not know about the Commission’s letter to the Minister of Justice recommending to terminate him for cause should not preclude him from relying on this letter to establish the Commission’s intention not to be bound by the terms of the employment contract upon his suspension.

In summary, the Supreme Court held that the Commission did not have the authority, whether express or implied, to suspend Mr. Potter indefinitely with  pay. Such a suspension was a substantial unilateral change to the contract, which amounted to constructive dismissal. Further, the Commission failed to establish business justification for suspension by not providing legitimate business reasons for Mr. Potter’s suspension, and by not acting in good faith when it refused to provide reasons for his suspension to Mr. Potter.

Deduction of Pension Benefits in Wrongful Termination Cases

The Supreme Court essentially reaffirmed the principles regarding deduction of pension benefits set out in IBM Canada Limited v Waterman, 2013 SCC 70. Accordingly, the Court indicated that pension benefits are not to be deducted if (a) they are not intended to be an indemnity for the sort of loss caused by the breach; and (b) the plaintiff has contributed to the entitlement to the benefit. In applying these principles to Mr. Potter’s situation, the Supreme Court noted that Mr. Potter’s pension benefits should not be deducted form the damages awarded to him, because they were not intended to compensate Mr. Potter in the event of his being wrongfully dismissed an d the pension plan was a contributory plan.