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Court says demotion of problem employee is not constructive dismissal
Until now, employers faced with a problem employee have probably considered only two
options: issuing warnings to the employee or proceeding directly to termination. Now, an Ontario
court has ruled that there is another possibility -- demotion. In O'Dwyer v. Dominion Soil
Investigation Inc. (January 4, 1999), the Ontario Court, General Division has held that, where
there is cause for dismissal, an employer can validly demote an employee and avoid liability for
constructive dismissal.
UNAUTHORIZED PURCHASE, UNTRUTHFUL MEMO
O'Dwyer was a project engineer who rose to the position of manager of the company's Windsor
operations. However, in 1991, O'Dwyer's career prospects were dimmed when the Windsor
branch encountered financial difficulties.
In March 1992, as required by company policy, O'Dwyer submitted a request to head office
requesting authorization to purchase a radio communication system for over $15,000. The
request was refused, and it was emphasized to O'Dwyer that, in view of the financial pressures
on the company, expenditures had to be kept under control.
Despite this directive, O'Dwyer went ahead with the purchase, committing the company to pay
over $23,000 in installments, including financing charges, to the supplier. Further, he sent a
memo to his superiors indicating his acceptance of the "recommendation" not to purchase the
system. Ultimately, the company found itself having to buy out the contract at a cost of almost
$18,000.
THE FINAL STRAW(S)
But O'Dwyer's missteps had not yet run their course. In September 1992, two more issues came
to light. In violation of a company policy that was known to him, O'Dwyer had been making
personal use of the company car. Around the same time that this emerged, an audit revealed that
the company was obliged to pay for additional air time under a contract that O'Dwyer had
entered into without the company's knowledge.
The response was not long in coming. O'Dwyer was informed that, as a result of his
demonstrated inability to carry out company policies, he was to be demoted back to senior
engineer at the Windsor branch, but with no change in his salary and benefits. O'Dwyer went on
vacation and never returned to work.
O'Dwyer commenced a wrongful dismissal action against the employer. Before doing so,
however, he applied for unemployment insurance benefits. Employment Canada determined that
O'Dwyer had left his job voluntarily without just cause. This decision was appealed by O'Dwyer
to the Board of Referees, which was provided with O'Dwyer's statement of claim for his court
action and a written presentation concerning his employment with the company.
The Board denied the appeal. It agreed that O'Dwyer's resignation was voluntary.
COURT: CAUSE FOR DISMISSAL, CAUSE FOR DEMOTION
In court, O'Dwyer took the position that his demotion amounted to constructive dismissal. The
company responded that he had been discharged for cause, pointing to four grounds: poor
managerial performance, the contract for the radio communication system, the unauthorized use
of the car, and the non-disclosure of the air time contract.
The court held that O'Dwyer had indeed given his employer cause for dismissal. While his weak
managerial performance did not by itself amount to cause, the other factors, particularly in light
of his purchase of the radios in direct contravention of a company directive, were sufficient to
allow the company to dismiss him for cause.
But the company had not dismissed him. So the court considered whether the demotion exposed
the company to a claim of constructive dismissal:
"[I]f a company, with cause to dismiss without notice, doesn't dismiss, is it then
susceptible to being sued for constructive dismissal and suffer damages when it demotes
that employee but offers him the same salary and benefits he had before notwithstanding
he no longer was the branch manager? I don't accept that premise in this case."
The court stated that, once the company had cause to dismiss O'Dwyer, it had four options:
"Without limiting the options of the company, it seems to me it can ... dismiss the
employee for cause and not be subject to any damages. Secondly, it could have demoted
O'Dwyer to a position of less responsibility and kept him at his same wages and benefits
and again not been subject [to] any damages. Thirdly, it could have demoted him to a
position of less responsibility, decreased his pay and benefits and fought a case of
constructive dismissal. Fourthly, it could have done nothing."
In this case, the court concluded, the company had the right to demote O'Dwyer while
maintaining his wages and benefits, without being liable for constructive dismissal.
In Our View
Managers should appreciate the flexibility this decision provides for dealing with unsatisfactory
employees, but should note that the conclusion was based on the finding of cause for dismissal.
As FOCUS readers will be aware, the Supreme Court of Canada has rejected the doctrine of
"near cause" (see "Supreme Court rejects doctrine of 'near cause'"
on our Publications page), so that anything less than cause for dismissal
will entitle the demoted employee to treat the demotion as constructive dismissal, for which
reasonable notice is required. It is also worth noting that the court differentiated between a
demotion that does not entail a reduction in salary and benefits and one that does. (See also "Court of Appeal opens door to suspension of non-union employees" and ""Unreasonable and unjust": SCC says not just any dishonest conduct by employee is cause for dismissal" on our Publications page.)
For further information, please contact André Champagne
at (613) 563-7660, Extension 229 or J.D. Sharp at (613) 563-7660, Extension
233.
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