Employer’s financial difficulties do not justify 40% salary reduction; Employee awarded 23¾ months’ severance.

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  • January 28, 2016

Employer’s financial difficulties do not justify 40% salary reduction; Employee awarded 23¾ months’ severance.

An employer’s financial difficulties do not permit it to unilaterally reduce an employee’s salary, according to a recent Ontario Superior Court decision. The Court awarded the employee nearly 24 months’ severance, the upper limit for severance awards in Canada.
George Ziten was employed by Sadie Moranis Realty Corp. (“SMRC”) for 17 years, most recently in the position of Vice President, Finance, and earned annual compensation of more than $186,000.00. In March 2014, Ziten was told that due to the deterioration of SMRC’s financial condition, SMRC would reduce his hours and salary by 40%. Initially Ziten was told the reduction was temporary, but later was advised the change was permanent. A few days later, Ziten told SMRC that this arbitrary reduction in salary was unacceptable and that he was treating it as a constructive dismissal.

The Court relied on the recent Supreme Court of Canada case of Potter v. New Brunswick (Legal Aid Services Commission), in considering whether or not Ziten had been constructively dismissed. In particular they relied on the Supreme Court’s analysis of the principle:

“When an employer’s conduct evinces an intention no longer to be bound by the employment contract, the employee has the choice of either accepting that conduct or changes made by the employer, or treating the conduct or changes as a repudiation of the contract by the employer and suing for wrongful dismissal… Since the employee has not been formally dismissed, the employer’s act is referred to as “constructive dismissal”. The word “constructive” indicates that the dismissal is a legal construct: the employer’s act is treated as a dismissal because of the way it is characterized by the law…

The Court determined that “remuneration is a significant, if not the most significant, term of an employment contract.” In the Court’s view, a 40% reduction in salary was reasonably perceived by Ziten as a substantial change in the essential term of his employment contract and he was therefore constructively dismissed.
The Court then considered the proper amount of notice that Ziten should have received, taking into consideration his age (63 years old), his length of service (17.25 years), and his senior position. In addition, the Court relied on an earlier decision which stated:

Economic factors such as the downturn in the economy or in a particular industry or sector of the economy may indicate that an employee may have difficulty finding another position and may justify a longer notice period.

The Court found Ziten was entitled to 24 months’ severance, which it reduced only slightly to 23¾, to account for the chance Ziten might find alternate employment during the reasonable notice period.
This decision is significant in that it not only confirms that changes to renumeration can be the basis for constructive dismissal but also involves a monetary award that is at the upper limit of what most Courts award to employees who have been wrongfully dismissed.