Exec cries forced resignation through demoted position and $90,000 salary reduction
Ontario's Superior Court of Justice recently dealt with an employment law matter involving constructive dismissal following an extended maternity leave.
The case centred on whether an employer's attempt to demote and reduce an employee's salary upon her return from maternity leave constituted wrongful termination.
The worker argued that her employer constructively dismissed her by presenting a letter agreement that demoted her from her executive position and reduced her salary by $90,000.
She said that the demotion and pay cut, presented after she had been on extended maternity leave at the company's request, created a coercive environment that forced her resignation.
Constructive dismissal after maternity leave
The case involved an executive at an advertising company that faced severe financial pressures during the COVID-19 pandemic. The company reduced its workforce from forty or fifty employees to ten, including management.
To ensure survival and recovery, the employer promoted its second-year director of analysis and insights to associate partner and vice-president of media and analytics in March 2021, then again to executive vice-president, media and analytics in October 2021.
This final promotion came with a significant salary increase from $220,000 to $300,000, and a phantom share allocation increase from 2.5% to 5%.
Despite these restructuring efforts and the hard work of personnel, including the worker, the company's bottom line continued to slide further into the red in 2022-23.
The worker took maternity leave in July 2022, having trained the employee occupying her original post to cover her duties during her absence. About a week into her leave, the chief executive officer alerted her to the company's extreme cash flow problems.
Over the course of 2022 and early 2023, the company asked the worker twice to extend her leave to relieve the cost of employing her.
During these discussions, the parties openly discussed a severance package as one of the options. In February 2023, the company president notified the worker that she and the CEO were on reduced compensation and expected the worker to accept a $90,000 reduction in base salary to help the company.
Analysing constructive dismissal claims
The court established the fundamental legal framework for analysing constructive dismissal claims. The judge referenced established case law, noting that "a demotion and a significant reduction in income independently amount to constructive dismissal."
A demotion generally means loss of prestige and status, whilst a significant pay reduction breaches the fundamental bargain of exchanging work for money.
On 3 April 2023, the president presented the worker with a letter agreement reducing her salary to $210,000 and demoting her to associate partner and vice-president of media and analytics.
During trial, the CEO testified that he considered this to be a promotion, stating that a partner implied part-owner of the company. However, the court did not find this evidence credible, since the objective evidence showed that the new title was the same as the worker's previous one.
The president stated in the email attaching the new contract: "Please don't feel that you're being dismissed. There's no executive here, including yourself that is not needed, valued or wanted. We have been doing what we can to rebuild the agency, culture and keeping all executive team members."
The court found that despite these assurances, the overall context created pressure on the worker. The judge noted that "the presentation of the letter exerted pressure on [the worker] to accept the new terms or leave the company."
Constructive dismissal mitigation defence failed
The employer raised a mitigation defence, arguing that the worker failed to adequately seek alternative employment following her resignation.
However, this defence faced significant evidentiary challenges. The court excluded certain documentation related to the worker's job search efforts due to late disclosure under court rules, creating what the judge described as "patent unfairness to the defence."
A chart attached to the worker's evidence could not be used to prove she had started her job search in November 2022. However, the court did not interpret this as evidence that she failed to look for work, as the defence argued.
The worker secured a consulting contract for marketing in May 2023, performing services worth $24,108.55 from May to August. The court noted she would not have received this contract work if she had not been reaching out to her contacts.
The court emphasised the legal standard: "The employer bears the burden of proving the employee failed to mitigate the damages. This includes the proof that the employee 'could have procured other employment of an approximately similar kind.'"
The judge noted that the party in breach has "a high onus, because the party in breach is demanding positive action from the sufferer of the breach." The defence failed to provide material evidence that the worker could have secured a similar position with sufficient efforts.
Constructive dismissal notice period determination
In determining the appropriate notice period, the court applied the standard approach considering the worker's age, length of service, nature of position, and availability of similar employment.
The court noted that more prestigious positions tend to command longer notice periods because they are less common in the job market.
The worker's counsel cited various decisions providing twelve months' notice as the standard for senior employees at the executive level despite relatively short tenure of 3-5 years.
The employer's counsel cited decisions supporting a lower notice period of about six months. However, the determining factor was the availability of comparable positions. The company had promoted the worker rapidly into the senior position, and she had performed well.
The court found the worker's inability to secure comparable permanent employment particularly significant. The judge noted: "The fact that she could only secure contract work despite being an expert in marketing analytics meant she knew how to look for a comparable job but was unable to secure one."
The court awarded damages based on a twelve-month notice period, calculating total compensation at $317,274.36, less the $26,658.55 earned from contract work, resulting in net damages of $290,615.81. The court declined to award phantom share values, noting that the triggering event for liquidation had not yet occurred.
Moral damages awarded
The court distinguished between punitive and moral damages in its analysis. The judge found insufficient evidence for discrimination based on gender and maternity status but addressed the employer's handling of the situation.
The court referenced the legal standard that moral damages "are compensatory and are akin to aggravated damages and can be awarded where the employer's conduct is unduly insensitive."
Whilst acknowledging that the salary cut attempt was motivated by cost reduction rather than malice, the judge found "no justification of imposing a demotion." The court noted:
"Any employee, especially one whose executive status is closely tied to her identity and self-esteem, would react negatively to a document containing a demotion."
The fact that the demotion may have resulted from a word processing error did not excuse the employer from the impact.
Given that "the demotion appears to have resulted more from carelessness than malice," the court assessed moral damages "in the middle of the range, in the amount of $40,000.00."
The final judgment awarded the worker $290,615.81 in lieu of notice plus $40,000 in moral damages, totalling $330,615.81.
