Constructive dismissal occurs when an employer unilaterally changes a fundamental term of the employment contract, such that the employee is entitled at law to treat the employment as being terminated. An employee who is constructively dismissed has all the rights of an employee who is expressly terminated by the employer without cause.
The question lawyers are asked time and time again is what kind of fundamental breach by the employer will allow the employee to claim he or she has been constructively dismissed? In the recent case of Pavlis v. HSBC Bank Canada, 2009 BCSC 498 the BC Supreme Court addressed the issue of whether a failure to pay an employee a portion of her average salary resulted in constructive dismissal.
The Plaintiff, Marcia Pavlis, was employed by HSBC for approximately 3½ years. As an investment advisor, Pavlis was entitled to “trailer fees” – fees paid to investment dealers by mutual fund companies with whom an investment advisor invests on behalf of his or her clients. On two occasions, Pavlis was not paid the trailer fees to which she believed she was entitled. After she went on disability leave, the relationship between Pavlis and HSBC deteriorated significantly. This culminated in Pavlis asserting that she had been constructively dismissed as a result, in part, of HSBC failing to pay her the trailer fees to which she was entitled. HSBC took the position that she had resigned.
HSBC agreed that it had, through error, shorted Pavlis for some commissions owed to her (albeit not in the amount that Pavlis claimed). The Court found that regardless of whether HSBC or Pavlis was right about the amount of commissions shorted (between 2% and 5%), neither figure was significant enough to result in a finding of fundamental breach of the employment contract. Moreover, the Court concluded that the employer’s delay in rectifying the error did not elevate the relatively small amount in dispute to a point where it constituted a fundamental breach. Thus, Pavlis’s claim for constructive dismissal failed and the action was dismissed.
This decision is important because it establishes the following guidelines:
- A reduction or failure to pay an employee up to 9-10% of his or her average salary, does not amount to a fundamental breach of the employment contract.
- A reduction or failure to pay an employee between 14-17% can amount to fundamental breach, but only in conjunction with some other significant unilateral change to the contract.
- Failure to pay an employee 20% or more will by itself amount to a fundamental breach.
The practical implications of this case are significant, especially in the current economic climate. An employer who must resort to wage cuts as a cost cutting alternative can be guided by the Court’s decision in Pavlis. Significantly, according to Pavlis, constructive dismissal will not flow from a 10% (or less) reduction in employee wages so long as no additional unilateral changes to the employment contract are implemented. Further employers may be able to implement reductions of up to 17%, particularly in our view where such cuts are implemented equally, to all employees.