Employers and Employees in Times of Economic Downturn or Distress

Can an Employer Fire an Employee or Reduce an Employee's Salary Because of an Economic Downturn or Distress

​​The economic distress and downturn caused by the COVID-19 pandemic has created unprecedent changes to the economy and many of relationships between employers and employees.
 

​It has raised many questions, including the following:
1.  Can an employer terminate a employee because of an economic downturn or distress?;
2.  Does economic downturn or distress impact an employee’s claims for severance?
3.  Can an employer reduce an employee’s salary because of economic downturn or distress?

 
1.  Economic Downturn or Distress and Termination of Employment.
 
Courts in Alberta have previously considered whether economic distress or downturn is cause for an employer to terminate employment and dismiss the employee.
 
In, Wilkinson v. T. Eaton Co., 1992 CanLII 6115 (AB QB) the Court held that corporate and financial reasons are not grounds for termination with the Court providing the reasoning in part as follows:
 
“[36] There is some danger in applying this kind of argument to the interpretation of an employment contract. It may well be that under some circumstances one may imply a term into a contract which relieves an employer of some provisions of his contract where corporate reorganization or financial exigency exists. It was not suggested at trial that any such term could be implied into the contract at bar although evidence was given (without figures or background evidence of any kind) that the defendant was in a difficult market and having a difficult economic time. 
[37] Nonetheless, in the absence of a term in the contract, express or implied, permitting what would otherwise be a unilateral and fundamental change of the worker's contract of employment, the basic law of contract prevails. That is to say that changes of a fundamental nature to a contract of employment made unilaterally by an employer without the agreement of or acceptance by the employee constitutes a rejection by the employer of the contract and constitutes a constructive dismissal. And this is so even though the unilateral decision may have been made for corporate and financial reasons of importance to the defendant and without any intention to harm the employee.”
 
However, there are other law of contract principles that may apply, particularly in the unprecedented circumstances of the COVID-19 pandemic, and while economic downturn or distress may not be grounds for termination, the law or doctrine of frustration may apply. 
 
Law of Frustration of Contract
 
The Supreme Court of Canada has considered the law of frustration in Peter Kiewit Sons' Co. v. Eakins Construction Ltd., 1960 CanLII 37 (SCC), endorsing the definition of the law of frustration of contract from a  House of Lords’ decision in Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 at 721, [1956] 2 All E.R. 145 (H.L.) which stated in part as follows:
 
“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.  ...
It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”
The Supreme Court of Canada more recently in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (CanLII), [2001] 2 S.C.R. 943, confirmed the definition of the law of frustration in part as follows at paragraphs 53 and 55:
“Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes "a thing radically different from that which was undertaken by the contract
....
The court is asked to intervene ... to relieve the parties of their bargain because a supervening event ... has occurred without the fault of either party. For instance, in the present case, the supervening event would have had to alter the nature of the appellant's obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agreed to under the tendering contract....”
 
In Ryhorski v Commercial Industrial Manufacturing Ltd., 2019 SKQB 85 (CanLII) the Court summarized the consideration of the doctrine of frustration in the context of an employee’s illness or incapacity as follows:
 
“[53]. In this regard, the recent case of Roskaft v RONA Inc., 2018 ONSC 2934 [RONA], is of assistance. At paragraph 11, the court noted the doctrine of frustration:
“[11]   The parties agree that if there was no reasonable likelihood, at the time of termination of employment, that Mr. Roskaft would be able to return to work within a reasonable period of time, his employment contract had become frustrated. The doctrine of frustration applies because the Plaintiff’s permanent disability made his performance of the employment contract impossible and the obligations of the parties are therefore discharged without penalty: Fraser v. UBS Global Asset Management, 2011 ONSC 5448; Nason v. Thunder Bay Orthopaedic Inc., 2015 ONSC 8097, at para 180; Lemesani v. Lowerys Inc., 2017 ONSC 1808, at para 137.”
[54]. At paragraph 23 the court in RONA added:
“[23]   The Court must determine whether, on the basis of the evidence before it, a determination can be made on whether at the time of the Plaintiff’s termination of employment there was no reasonable likelihood that he would be able to return to work within a reasonable period of time. [Emphasis in the original.]”
 
In the employment context, Courts have considered frustration in the context of an employee’s prolonged illness or incapacity, focused and the Courts have considered the whether nature of the illness or incapacity, length of illness or incapacity, and nature of services performed by the employee, as noted by the Court in Skopitz v. Intercorp Excelle Foods Inc., 1999 CanLII 14852 (ON SC) at paragraph 21 which states as follows:
 
“Whether a contract of employment has been frustrated by an employee’s illness or incapacity depends on whether or not the illness or incapacity was of such a nature or likely to continue for such a period of time that either the employee would never be able to perform the duties contemplated by the original employment contract or that it would be unreasonable for the employee to wait any longer for the employee to recover. To determine if a contract has been frustrated, regard must be had to the relationship of the term of the incapacity or absence from work to the duration of the contract, and to the nature of the services to be performed (Lafrenière v. Leduc 1990 CanLII 6832 (ON SC), (1990), 66 D.L.R. (4th) 577 (Ont. H.C.); Yeager v. R.J. Hastings Agencies Ltd. (1984), 1984 CanLII 533 (BC SC), 5 C.C.E.L. 266 (B.C. S.C.)).”
 
It should also be noted that the employment contract may also be considered in light of other contract principles such as force majeure clauses or conversely whether the parties intended that the contract would apply contracting parties considered the circumstances and intended for the contract to continue to apply such that the circumstances are effectively not “new” or “changed” but to be “radically different” as contemplated by the Supreme Court of Canada in Naylor Group. Inc. v. Ellis-Don.
 
So, whether a Court finds there to be frustration of a contract will be depend upon the contract and the particular facts and circumstances, the parties’ intent, and if the Court considers there to be frustration of a contract and the performance of the contract impossible then the obligations of the parties are automatically discharged without penalty by operation of the doctrine of frustration.
 
2.  Does economic downturn or distress impact an employee’s claims for severance?
 
Where a party has been wrongfully terminated, whether it be constructive dismissal or termination without cause, Courts in Alberta have as well previously considered the impact of an economic downturn upon an employee’s claim for severance.
 
The Alberta Court of Appeal considered the impact of economic downturn upon severance claims in Foxridge Homes Ltd. v. Farmer, 1994 ABCA 41 (CanLII).  Foxridge Homes v Famer was an appeal by an employer for a wrongful dismissal claim of a employee earning income partially from salary and commissions from home sales, with three Justices from the Court of Appeal hearing the appeal, and the three Justices were divided on the issue of reasonable notice.  Justice McFadyen providing her own reasons upheld the notice period awarded by the trial judge notwithstanding it as “at the very highest end of what will be upheld”, and stated that “an important factor in this case is the difficult economic situation in new home sales in Calgary at the relevant time.”
 
There are other decisions in Alberta which more recently consider this issue, and which have considered the impact of economic downturn, noting it is but one factor, but also noting that economic downturn is a rather complicated factor that can be argued in favor of both increased and decreased awards of severance.  The reasoning of the Courts sets out the Court’s rationale for why it can be a complicated factor.
 
In Lederhouse v Vermilion Energy Inc, 2015 ABQB 387 (CanLII) the Court stated as follows:
 
“[33]. An important and interesting case that Vermilion presents to this Court is Novak v Flintech Services Ltd, 2001 ABQB 1077 at para 12, 310 AR 396, in which Martin J, as he then was, considered a situation in which the employer terminated the employee in anticipation of an economic downturn. He said the following:
“The notion that the economic circumstances of an employer are to be taken into account was further confirmed in Heinz v. Cana Construction Co. (1987), 1987 CanLII 3203 (AB QB), 55 Alta. L.R. (2d) 382 (Alta. Q.B.), at 387:
There is, however, judicial support for the proposition that an economic downturn in the fortunes of an employer which is not brought about by his own incompetence or mismanagement constitutes a legitimate factor to consider in determining the requisite notice. These cases recognize that it seems unrealistic to force an employer to give the same notice period in a time of recession as he would in a time of prosperity.”
[34]           In the end, Martin J did not have to deal with this specific issue, as the economic downturn that the employer anticipated never materialized. But what does this tell us? Not surprisingly, it says that if, during an economic recession, an employer terminates an employee it need not give the employee “the same notice period.” Why? The employer cannot help that the world economy is faltering and should not be “punished” therefor. If, however, the economic downturn occurs after it terminates the employment of the employee, should it have to bear the burden of the reduced employment opportunities being available to the employee? The employee is required to mitigate her damages, by seeking out employment. If the economy were vibrant, the likelihood of her finding employment would be enhanced, and the employer’s responsibility would be reduced. If, however, the economy is depressed, the employee cannot possibly mitigate her damages to the same extent.
[35]           This Court finds that the depressed economy is a factor that it can consider. It is not the sine qua non, and is simply placed into the matrix of factors that it will consider.”
 
Further, in Freeman v PetroFrontier Corporation, 2017 ABQB 340 (CanLII) the Court at paragraph 31 recited paragraph 33 of the Lederhouse v. Vermillion Energy decision, and stated further as follows:
 
“A.   Economic Downturn
…
[32]           The Court went on to note that in the end, Justice Martin did not have to deal with the issue, and found that a depressed economy is a factor that can be considered, without stating whether it would militate for or against an extended notice period.
[33]           In my view this was an appropriate approach, because the state of the economy may in any given case militate either for or against an extended notice period. In some cases, it may indeed be unrealistic (and unfair) to burden an employer with the same notice period in a depressed economy as it would be in a time of prosperity. A company that is struggling to “keep the lights on” might well be able to argue that the reasonableness of it overarching duties to its shareholders, remaining employees and service suppliers is at least a one factor to be evaluated: see Garvin v Rockwell International of Canada Ltd (1993), 50 CCEL 295 (Ont Ct J (Gen Div)).  Conversely, a company that has chosen to divest itself of operations (and associated staff), in favour of a non-operator’s revenue stream can fairly be expected, even in a depressed economy, to make provision for those who it is putting out of work. In this case, for example PetroFrontier could have done so by providing Ms. Freeman with working notice as soon as it transferred its Georgina Basin operatorship responsibility to Statoil in September 2013. Alternatively, it could have done so by providing more reasonable working notice, or payment in lieu of same, when it terminated her employment in January 2014.”
 
So, economic downturn may be one factor considered by the Courts in assessing severance.
 
3.  Can an employer reduce an employee’s salary because of economic downturn or distress?
 
At the outset, unilateral changes to the terms of employment will be subject to the consideration as to whether it is a constructive dismissal, and the Supreme Court of Canada in its recent decision Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10, clarified the common law respecting constructive dismissal setting forth a two branch test for constructive dismissal.  We have a separate post which comments upon the Potter v. New Brunswick decision in detail, and as it is a detailed legal and factual analysis it is outside the scope of this particular post to consider that decision.
 
The Courts in Alberta have previously considered whether or not an employer can reduce an employee’s salary because of economic downturn or distress.
 
In Hamilton & Olsen Surveys Ltd. v. Otto (1993), 145 A.R. 44 [12 Alta. L.R. (3d) 431] (C.A.), the defendant company withheld the company's 5% contribution to the R.R.S.P. plan and reduced the six weeks of annual vacation to four weeks. The capitalized value of the rollbacks was between 6.49% and 8% of the plaintiff employees' compensation. The company was experiencing economic hardship. The Court held the plaintiff employees had not been constructively dismissed. At 46, the Court stated: 
 
“As we have said, reductions in the benefit package due to external economic pressures, but where salaries are maintained, have consistently escaped characterization as fundamental breaches.”
 
Court in Hamilton & Olsen v Otto stated its reasoning as follows;
 
“[9] We must respectfully disagree with the learned trial judge that what happened here should be characterized as a constructive dismissal. On the evidence it was a periodic adjustment in compensation that had traditionally marked the collateral benefits between the employer and its employees, compensation levels which depended on the current fortunes of the company. What happened here was not an absolute refusal to perform the contract amounting to its rescission by the company. See Thompson and Alix Ltd. v. B. F. Smith [1933] 2 D.L.R. 214 (S.C.C.). As we have said, reductions in the benefit package due to external economic pressures, but where salaries are maintained, have consistently escaped characterization as fundamental breaches.
[10] The situation in this case is, in our opinion, the same as that in Poole v. Thomas & Saunders Whitehead Ltd. (1987) 43 D.L.R. (4th) 56,63 (B.C.C.A.) and we adopt what is said by Wallace J.A. in that case at pp. 64 and 65. 
‘The common theme, emphasized by every court, when determining whether a breach of contract justifies the innocent party terminating the contract rather than confining his remedy to the damages caused by the breach, is that the breach must be tantamount to the frustration of the contract either as a result of the unequivocal refusal of one party to perform his contractual obligation or as a result of conduct which has destroyed the commercial purpose of the contract-thereby entitling the innocent party to be relieved from future performance. 
The non-payment of a relatively minor portion of the consideration to be paid for services which are to be performed over a prolonged time period, would not by itself, usually meet such criteria and hence would not qualify as a fundamental breach. Damages could be expected to afford a complete remedy: see Mersey Steel & Iron Co. v. Naylor, Benzon & Co., supra (default in payment of an instalment payment). Accordingly, one must ascertain if there are special circumstances in the present case which warrant this particular breach of contract being characterized as a fundamental breach amounting to a repudiation of the contract. 
… 
There is in my opinion, a clear distinction between the payment of an annual bonus which could vary depending on the employer's characterization of the employee's performance (albeit a minimum of 15% was due during the early years of the contract) and a basic, fixed, monthly wage agreed upon by the parties to be paid for the services to be rendered by the employee during the term of the contact. In the latter instance one could readily infer that a refusal to pay the agreed salary indicated an intention of the employer not to be bound by the agreement. However, even the cases cited by the trial judge indicate that there must be some circumstance beyond the mere non-payment of salary to give rise to the inference that the employer has refused to perform the contract.’
[11] There is nothing in the evidence to support an inference that the appellant intended not to be bound by the contract. Quite the contrary, the evidence clearly manifested the appellant's intention to perform the contract as they understood it. If the future contributions to the Pension Plan and the extent of future vacations were terms of the contract, as found by the trial judge, their proposed breach would be minor, be readily compensable by damages, and would not constitute constructive dismissal.”
 
So, as set forth Hamilton & Otto v Olsen Alberta the Courts have found that material, albeit minor, changes do not constitute constructive dismissal.
 
It should also be noted that in Hamilton & Otto v Olsen, economic downturn was an important factor in considering the change in pay.
 
Courts in other jurisdictions have allowed changes to the salary that perhaps go beyond those considered by the Court in Hamilton & Otto v Olsen.
 
In Pavlis v. HSBC Bank Canada, 2009 BCSC 498 (CanLII) the Court summarizes the case law to the effect that a failure to pay an employee up to 9 to 10% does not constitute a constructive dismissal stating as follows:
 
“[53] Comparing the case law establishes that the failure to pay an employee up to approximately 9-10% of his or her average salary without more does not amount to a fundamental breach:  Poole, supra, and McSeveney v. Phone Directories Company, Inc., 2005 BCSC 1510.  A failure to pay between 14-17% can amount to a fundamental breach, but only in conjunction with some other significant unilateral change to the employment contract:  Doran v. Ontario Power Generation Inc. (2007), 2007 CanLII 49486 (ON SC), 61 C.C.E.L. (3d) 232 (Ont. S.C.).  A reduction in remuneration amounting to anywhere between 20-46% (and presumably anything greater) by itself has been held to amount to a fundamental breach:  Boyd v. Whistler Mountain Ski Corp., [1990] B.C.J. No. 821; Streight v. Dean, 2002 BCSC 399; Wood v. Owen De Bathe Ltd. (c.o.b. Canadian Tire), [1998] B.C.J. No. 288 (S.C.) (QL), aff’d 1999 BCCA 29; Farquhar v. Butler Brothers Supplies Ltd. (1988), 1988 CanLII 185 (BC CA), 23 B.C.L.R. (2d) 89 (C.A.); and Ilkay v. Acadia Motors Ltd., 2006 NBCA 103.”
 
So, a reduction in an employee’s salary may or may not constitute constructive dismissal, which is in and of itself a detailed analysis, involves a consideration of multiple areas of the law not all of which are set forth in this post.  There are additional considerations such as the Employment Standards Code [Alberta], the employee’s obligation to mitigate and whether given the particular facts and circumstances it is reasonable for the employee to remain employed and sue the employer.
 
If you are an employer or employee and require assistance respecting your employment law matters, please contact us. 
 
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