Why changing existing employment contracts unilaterally can lead to class action lawsuits

Howard Levitt: Existing employment agreements can indeed be amended — but very carefully

The pandemic has sent alarm bells ringing in human resource departments across the country who are worried about the deficiencies in their current employment agreements.

As the lockdown left many employers scrambling to continue operating while their workforce was temporarily forced to operate from home, a more significant challenge was to find strategies to preserve cash flow. To achieve this, many employers laid off almost all of their staff and reduced salaries and hours. Virtually all such schemes were illegal and exposed employers to wrongful dismissal claims.

Even major national law firms cut employee salaries between 10 to 15 per cent, knowing that a reduction in pay of more than 16 per cent is considered to be a constructive dismissal.

By reducing wages by less than 16 per cent, employers may avoid constructive dismissal claims but are still vulnerable to breach of contract claims from individual employees, or worse — class actions.

With swathes of employees laid off and then recalled, there has never been a more appropriate time to overhaul employment agreements. These improved employment contracts should include legal and enforceable termination provisions — taking direction from the recent Ontario court decisions in Waksdale and Rutledge (of which I wrote about last week).

These agreements should also address an employer’s right to lay off its workforce, reduce salaries and modify job duties. These and other modifications (e.g. tackling employees working from home) are critical to avoid future lawsuits and respond to changing times.

But there is a major problem in making these modifications. Employees need not sign new contracts with fundamentally different and disadvantageous terms. If they are fired for not doing so, it is a wrongful dismissal. What then are employers to do? Well, any employment can be terminated, actually or constructively, on proper notice.

The 2008 Ontario Court of Appeal decision in Wronko v Western Inventory Service Ltd. offers an important lesson for employers — on how to change existing employment agreements and avoid constructive dismissal claims. Darrell Wronko had been an employee of Western Inventory for 17 years, with the last four as vice-president national accounts and marketing.

Wronko’s employment agreement required Western to provide him with 24-months notice of termination. Western wished to dramatically reduce this notice requirement to three weeks per year, to a maximum of 30 weeks.

In August, 2002, Western asked Wronko to sign a document confirming that he agreed to the reduced termination provision, suggested that Wronko seek legal advice before signing it and noted that this agreement to change the term was “done voluntarily and is not a mandatory requirement for (his) continued employment”.

That made it a simple choice. Unsurprisingly, Wronko demurred and communicated his refusal to agree to Western in Sept. 2002. After receiving Wronko’s refusal, Western provided Wronko a 104-week notice of change to his employment agreement on Sept. 9, 2002. Wronko again reiterated his refusal to agree to the new agreement. After receiving Wronko’s second refusal, Western said and did nothing.

But 104 weeks and 4 days later, on Sept. 13, 2004, Western advised Wronko that the new agreement was now in place and if Wronko did not wish to accept the new terms and conditions of employment as outlined, Western did not have a job for him. The next day, Wronko wrote back, advising that he considered his employment terminated and sought two years’ pay severance as per his original contract.

The court found that Wronko made it clear that he did not agree to the change. The proper course of action for Western would have been to provide Wronko with a two-year notice of termination and offer Wronko re-employment on the new terms at the end of the notice.

Instead, Western gave Wronko with a notice of its intention to amend the termination provision effective September 2004. Despite Wronko’s refusal to agree to the new termination provision, Western permitted him to continue his employment according to the existing terms of his contract. In effect, it acquiesced to Wronko’s refusal and therefore accepted that the terms of the existing contract remained in effect.

So, on Sept. 13, 2004, when Western told Wronko to sign the new agreement or else, it provided Wronko with a notice of termination for the first time. The Court of Appeal awarded Wronko with 24-months’ notice — in line with Wronko’s original employment contract.

In short, an employer can notify the appurtenant executive that it’s offering a 24-month working notice of termination (or whatever the proper notice is for that person), after which time even offering a new job as a janitor is not constructive dismissal even though it’s unilateral. After those 24 months, the employee has no recourse and can either accept the lower position or resign.

But if the employer notifies the executive that, in 24 months, certain terms in his or her employment agreement will be amended (including, say, salary) and the executive disagrees, the employer cannot simply wait for the 24-month notice period to end and enforce the new contract.

That would be a constructive dismissal — the employer’s silence after the employee’s disagreement is acquiescence to their refusal.

This case offers both parties a critical lesson: existing employment agreements can indeed be amended — albeit carefully.

Got a question about employment law during COVID-19? Write to me at levitt@levittllp.com.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada.