Client Update: The Employer’s implied contractual obligation to supply work: common law developments in employment law

Following several Supreme Court of Canada decisions in the late 1990s and early 2000s, the law of constructive dismissal was well defined – or so many thought. The Court’s decision in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10, released on March 6, 2015, represents a common law development in this area of the law with important implications for employers. Significantly, it imposes upon employers an implied contractual obligation not to withhold work from employees without justification.

The Facts
The Plaintiff, David Potter, was appointed as the Executive Director of the New Brunswick Legal Aid Services Commission for a seven year term. Half way through his term, problems arose, prompting buyout negotiations between Mr. Potter and the Employer. The goal was to identify a mutually acceptable price for which the parties would terminate the employment contract. At the same time, the Employer began considering termination of Mr. Potter’s employment for cause.

While buyout negotiations were on-going, Mr. Potter went on sick leave for three months. He appointed a replacement to fulfill his job duties during his leave. When his leave was set to expire, the parties’ buyout negotiations had not yet concluded. The Employer therefore instructed Mr. Potter to remain at home, with full pay and benefits, until further notice. At the same time, the Employer’s Board, unbeknownst to Mr. Potter, made a recommendation to the Minister that Mr. Potter’s employment be terminated for cause.

In response to the direction to remain at home with pay, Mr. Potter, through counsel, asked whether he had been suspended. The Employer simply reiterated that he should not return to work until further notice.

No further communication occurred between the parties until Mr. Potter served the Employer with an action for constructive dismissal approximately eight weeks later.

The pivotal issue at trial and ultimately before the Supreme Court of Canada was whether the Employer’s transitioning of Mr. Potter’s sick leave into a paid administrative leave constituted “constructive dismissal”. In other words, did it represent a change so fundamental to the employment relationship that the employee would have understood that the employer no longer intended to be bound by the employment contract.

Decision of Trial Judge
The Trial Judge characterized the leave imposed upon Mr. Potter by the Employer as an indefinite, paid administrative suspension. He then made a series of crucial findings of fact:

  • There was no evidence that the Employer intended to remove Mr. Potter from his duties permanently.
  • The paid administrative suspension was fully consistent with the parties’ relationship at the relevant time (negotiations of an acceptable buyout package).
  • The directive that Mr. Potter remain at home was fully consistent with what Mr. Potter had already indicated he would accept if the terms were right, namely that his contract be bought out.
  • It was appropriate for the Employer not to have advised Mr. Potter that it had written to the Minister to recommend termination for cause as to have done so could have been seen as a high-handed approach to buyout negotiations.
  • The Employer did not act in bad faith.

In light of the factual context, the Trial Judge found that a reasonable person in the shoes of Mr. Potter would not have felt that his employment had been terminated. The action for constructive dismissal was dismissed.

The Court of Appeal upheld the Trial Judge’s decision.

Supreme Court of Canada
In overturning the lower courts, the Supreme Court of Canada made incremental developments to the test for constructive dismissal. In so doing, it also made a significant development in the common law by confirming the existence of an implied term in every employment contract that an employer will not withhold work from an employee in bad faith or without justification.

Specifically, the Court found that there are two alternative ways by which constructive dismissal may occur:

  1. An employer’s unilateral breach of a fundamental term of the employment contract; or
  2. A series of actions that, taken together, demonstrate the employer no longer intended to be bound by the contract.

The Court then elaborated the former option in detail, providing the following two step test to determine whether constructive dismissal has occurred:

  1. Has a breach of the employment contract occurred?
  2. If so, is the breach of contract sufficiently important that a reasonable person in the shoes of the employee would have felt that the essential terms of the contract were being substantially changed?

If the answer to both of these questions is yes, the employee has been constructively dismissed.

With respect to the first question, the employee normally bears the burden of proving that a breach occurred. However, if the alleged breach is an administrative suspension, the onus shifts to the employer who must demonstrate that:

  1. The employee consented to the suspension; or
  2. The suspension is authorized by an express or implied term of the employment contract.

The Court then went on to hold that there is an implied term in every contract that an employer will not withhold work from the employee “in bad faith or without justification”. As a result, an administrative suspension will always constitute a breach of the employment contract unless the employer is able to demonstrate the suspension was “reasonable and justified”. Although this is a fact-specific exercise, the employer will likely have to demonstrate all of the following:

  1. The suspension was with pay.
  2. The suspension was motivated by a legitimate, good faith business reason.
  3. The business reason was communicated to the employee.
  4. The suspension was short and for a finite time period.

If an employer is not able to demonstrate the above, a breach of the implied term of the employment contract has occurred. Accordingly, the test moves to the second question.

At that juncture, the employee bears the burden of demonstrating that, “a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed”. However, in the case of an administrative suspension, this burden is very low: the Court stated that, in cases of administrative suspension, an affirmative response to question 1 will usually make question 2 a mere formality; the only exception might be if the duration of the suspension was particularly short.

Analysis
The Court’s identification of an implied obligation upon employers not to withhold work is a significant common law development.

Historically, the law has recognized an implied obligation to supply work in certain types of employment. For example, because commission-based employees rely upon their ability to perform their job functions to earn all or part of their salary, employers have historically been obliged to permit such employees to perform their job duties. Similarly, employees who derive a significant reputational benefit from performance of their work (for example, corporate executives in the public eye) have historically enjoyed a common law right to exercise their job functions.

The Court’s decision is significant as it extends to all employment contracts an implied obligation not to withhold work without legitimate business reasons.

Lessons for Employers
In certain circumstances, it may be prudent to contract out of the implied common law obligation not to withhold work by an explicit contractual term clarifying that the employer’s obligations do not include an obligation to supply work.

In circumstances in which an employee must be temporarily removed from the workplace for administrative reasons, it is imperative to communicate the legitimate business reasons for this removal to the employee in writing, along with confirmation of a short, finite time frame for this suspension, as well as the fact that salary and benefits will continue to be paid in the interim.

Unanswered Questions
The Court’s decision does not comment upon the argument raised by the Employer that an implied obligation to provide work in all cases would be inconsistent with the widespread and accepted practice of providing pay in lieu of working notice on termination. If employees have a contractual right to perform their job functions, can they really be forced to accept pay in lieu of working notice upon termination? If an employer insists upon pay in lieu of working notice upon termination, can an employee initiate an action for constructive dismissal seeking not only the paid notice, but also damages for bad faith?

Deduction of Pension Benefits
The Court further confirmed that its decision in IBM Canada Limited v. Waterman, 2013 SCC 70, that pension benefits should not be deducted from damages paid for wrongful or constructive dismissal, applies not only to private pension plans, but also public plans governed by the Public Service Superannuation Act.

The foregoing is intended for general information only. If you have any questions, or for a detailed list and background of our Labour & Employment practice group, please visit www.stewartmckelvey.com.

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