Another frequently asked question that employees and employers are asking due to coronavirus:
Can an employer legally reduce an employee’s pay?
Yes but it may depend on how much and whether the employment relationship allows for pay cuts.
Like the situation of layoffs in FAQ#1, a salary reduction potentially triggers a constructive dismissal scenario. Constructive dismissal occurs when an employer unilaterally changes a significant term of employment, without the employee accepting that change. When this occurs, the employee can quit and claim a severance package as if they were terminated outright.
As an employee’s salary is a significant term of employment, any unilateral change to pay may become a constructive dismissal.
So the question then becomes:
When does a pay cut become a constructive dismissal?
When there is more than a 25% pay cut, it will likely be a constructive dismissal. Each pay cut situation will be different. A pay cut of more than 30% may not be constructive dismissal if there is an established practice of fluctuating pay. A pay cut of only 5% may still be a constructive dismissal for some employees.
Does COVID-19/loss of business allow pay cuts?
No, even though an employer may be forced to implement pay cuts because the business is struggling, it does not change the fact that an employee may still claim constructive dismissal. Even when a business completely shuts down and terminates all employees, the employer must provide severance pay. The severance pay will not be reduced and must be calculated according to the employment contract or common law.
Does the Canada Emergency Wage Subsidy affect whether a pay cut becomes a constructive dismissal?
Likely not. The federal government recently enacted the Canada Emergency Wage Subsidy (CEWS), which provides employers with a 75% wage subsidy to pay their employees, up to a maximum of $847/week. This will help employers retain employees and provide them with some pay. CEWS will likely not affect the analysis on whether an employee can claim constructive dismissal. If anything, the CEWS will help employers avoid constructively dismissing employees.
How should an employee respond to a pay cut?
How an employee should respond to a pay cut will depend on what they want for their career. In uncertain times like these, an employee may want to accept the pay cut as long as it is temporary. In that case, they may need to advise the employer that they will continue to work only on the understanding that the pay cut is temporary. This will allow the employee to sue for constructive dismissal if the pay cut does become permanent.
If the employee was looking to leave employment anyways, the employee may sue for constructive dismissal and ask for severance pay.
If constructively dismissed, what is an employee entitled to?
The calculation of severance for constructively dismissed employees is the same for terminated employees. However, there is one important factor to consider when employees are faced with pay cuts: mitigation.
Most dismissed employees have an obligation to mitigate their damages - this means taking reasonable steps to find alternative employment. If an employee finds alternative employment during their notice period, the income earned from the new job will be deducted from the severance owed from the previous employer. Alternative employment may also come from the very employer that constructively dismissed the employee in the first place.
This means that for employees who have received pay cuts right now and want to sue for constructive dismissal, they may be obligated to continue to work with the pay cut for the duration of their notice period.
Take for example the employee who earns $100,000 a year but receives a 25% pay cut. The employee sues for constructive dismissal and is entitled to 12 months of severance ($100,000). However, because the employee needs to mitigate, they may be required to continue to work for the employer for the entire 12 months. If they work for 12 months with a 25% pay cut, they would have received $75,000. This $75,000 is part of their mitigation earnings. Therefore, a court will award the employee $25,000 for wrongful dismissal.
An employee will not be required to return to work when it will be unreasonable to do so. Some situations where it would be unreasonable to return to work is when there is a humiliating or toxic work environment.
Claiming constructive dismissal for a pay cut may be difficult given COVID-19
Given these unprecedented times, skyrocketing unemployment rates, and an uncertain job market, employees may be hesitant to claim constructive dismissal. Claiming constructive dismissal is the ultimate solution for an employee as they must be prepared to lose their job. Further, successfully suing for constructive dismissals is generally difficult for employees. If an employee is not successful in a constructive dismissal claim, they will be without a job and no severance. In some situations, it may be worth considering remaining employed or considering other options to secure a severance package.
Jason Wong is a Toronto Employment Lawyer practicing exclusively employment, labour, and human rights law. If you are an employee or employer who has questions about reduced salary or pay cuts due to coronavirus, please contact Jason at jason@wongemploymentlaw.com or 647-242-5961.