Honesty, Good Faith and Constructive Dismissal: Supreme Court Clarifies Employer Obligations
The Supreme Court of Canada’s recent decision in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 (“Potter”), contained three important developments of which employers should be aware:
The Supreme Court clarified the test for constructive dismissal.
The Court applied the test for constructive dismissal to administrative suspensions, and effectively held that, in many instances, a paid administrative suspension will constitute constructive dismissal.
The Court held that there is a duty of honesty and good faith owed to employees throughout the term of employment.
Below, we briefly discuss the Potter decision, then we elaborate on each of the above three developments.
The Decision
Potter was appointed as the Executive Director of Legal Aid for New Brunswick for a seven (7) year term. Midway through his term, the employer, the New Brunswick Legal Aid Services Commission, attempted to negotiate a buyout of Potter’s remaining term of employment. Potter and the employer were unable to come to terms on a buyout. Potter subsequently took a leave of absence for medical reasons. Potter’s sick leave, initially for one month, was extended to roughly three months. One week before Potter was to return to work, the employer placed him on an indefinite paid administrative suspension. The employer provided no reason to Potter for the suspension, but simultaneously recommended to the Lieutenant-Governor in Council, who had statutory authority over Potter’s employment, that Potter’s employment be terminated for cause. After eight weeks of paid suspension, Potter commenced an action for constructive dismissal. The employer responded by stopping Potter’s salary and benefits and taking the position that, by commencing the legal action, Potter had effectively resigned.
The Supreme Court applied the test outlined below in holding that Potter had been constructively dismissed.
Test for Constructive Dismissal
Constructive dismissal occurs where an employer’s actions demonstrate that it no longer intends to be bound by an employment contract. Where an employer is found to have constructively dismissed an employee, the employer owes the employee reasonable notice of the termination of employment (or pay in lieu thereof), despite that the employer has not formally dismissed the employee.
The Supreme Court stated in Potter that there are two branches of constructive dismissal. The first branch is where the employer’s breach of an express or implied term of the employment contract is sufficiently serious to constitute constructive dismissal. The second and less common branch is where the employer’s ongoing actions demonstrate that it does not intend to be bound by the employment contract, even if there is no specific breach of a term of such contract.
In Potter, the Supreme Court set out a two-part test for the first branch of constructive dismissal:
The employee must prove that the employer breached the employment contract in a manner that was detrimental to the employee.
There will only be a breach if the employer unilaterally changed the employment contract. Even then, if the employer had express or implied authority to make such change, or if the employee consents or acquiesces to the change, there is no breach.
If the employer breached the contract, the employee must prove that a reasonable person in the employee’s position would have felt that the essential terms of the employment contract were substantially changed by the breach.
Constructive Dismissal and Administrative Suspensions
If an employment contract expressly provides the employer the power to place the employee on an administrative suspension, such a suspension will not constitute constructive dismissal.
If there is no such express power to suspend in the employment contract, and the employee alleges constructive dismissal, the burden shifts to the employer to demonstrate that it had a legitimate business reason for the suspension and that the suspension was therefore reasonable and justified. In determining whether it was reasonable and justified, a Court will consider any relevant factors, including whether the employee was paid during the suspension and whether the employer acted honestly and in good faith. If the employer does not demonstrate that the suspension was reasonable and justified, the employee will have satisfied the first step of the test for the first branch of constructive dismissal, and the employee will then have to prove the second step.
In Potter, the employer had no express power to suspend, and the suspension was held not to be reasonable or justified, in part because the employer was not honest with the employee about the reason for the suspension.
Employers should consider including terms in employment contracts that give them the power to suspend employees for administrative reasons. In the absence of such terms, employers face the risk that an administrative suspension will result in a successful claim for constructive dismissal.
Duty of Honesty and Good Faith
It has for a number of years been clear that employers owe employees a duty of good faith in the manner of dismissal. A failure to adhere to this duty may result in an award of punitive damages payable to the employee.
In late 2014, the Supreme Court held in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”), that there is a duty of good faith and honesty throughout the performance of a contract. Bhasin was not related to an employment contract, and it was therefore unclear whether this duty applied in employment law. In Potter, however, the Supreme Court applied Bhasin and clarified that employers now owe their employees a duty of good faith throughout the term of employment. The Supreme Court held that the employer had breached its duty to Potter by failing to provide a reason for his paid administrative leave, and by failing to advise him that it had recommended that his employment be terminated for cause.
Employers must now be honest with employees throughout the life of the employment contract. The extent and boundaries of this new duty will become clearer in the coming months as the lower courts address allegations of breaches of this duty. In our view, in accordance with this duty, employers do not now have a positive obligation to disclose all information affecting the employment relationship, but cannot lie or mislead if asked by an employee. For example, if an employee dismissed without cause asks the "real reason" they were dismissed, the employer may simply repeat that the employee was dismissed without cause. The employer may not, however, mislead the employee or give a false explanation for the dismissal.
