(This is not legal advice and is for informational purposes only.)

On March 23, 2020, the Ontario government announced the mandatory closure of all non-essential businesses, after declaring a state of emergency. Widespread business closures across the Province have caused many employers to find ways to ‘make ends meet’, including instituting pay reductions as a cost-cutting measure.

Many have asked us, is it legal for an employer to unilaterally reduce an employee’s pay?

In short, there is no general law against a pay reduction, but if the employee does not consent to it, a unilateral pay cut may amount to a breach of the employment contract, and in some cases, it can trigger a constructive dismissal.

A constructive dismissal occurs when the employer breaches fundamental terms of the employment contract (that is, a breach that is sufficiently serious), thereby permitting the employee to treat the contract as wrongfully terminated and resign. This in turn, gives rise to an obligation on the employer’s part to pay constructive dismissal damages.

In short, yes. Courts have acknowledged that relatively minor reductions in pay may not amount to a constructive dismissal, while relatively “significant” pay reductions will. There is no specific numeric threshold that automatically triggers a constructive dismissal, however, the more severe the pay reduction, the more problematic.

For example, in Hamilton & Olsen Surveys Ltd.[1], the Alberta Court of Appeal held that the employer’s reduction in RRSP matching contributions and paid vacation time did not amount to a constructive dismissal. Of significance, the value of the RRSP contributions and vacation time were relatively minor components of the employee’s overall remuneration.

In Pavlis v HSBC Canada[2], the B.C. Supreme Court, in reviewing a number of cases in various provinces, including Ontario, noted that a pay cut of “9-10% of…average salary without more does not amount to a fundamental breach” while “14-17% can amount to a fundamental breach, but only in conjunction with some other significant unilateral change to the employment contract”, and finally a reduction in total compensation from “20-46% (and presumably anything greater) by itself has been held to amount to a fundamental breach.” These percentage thresholds are not a concrete rule of thumb, but this case is a useful guide in assessing the impact and potential legal consequences of a pay cut.

Even a small pay reduction, as noted above, may result in a constructive dismissal if it is coupled with other unilateral changes to the employment contract, for instance, a demotion, change in job duties, change in scope of responsibilities, a change to hours of work, among other things. In other words, a series of changes, viewed collectively, amount to a fundamental breach of the employment contract.

Generally, an employer’s financial circumstances or ability to pay is not a valid defence against a constructive dismissal claim.

But whether a pay reduction equates to a constructive dismissal is also contextual and fact dependent. We would be remiss not to consider the extreme financial predicament faced universally by business and institutions across the country. Of significance, most employers have been compelled to make significant changes to their business, and in many cases, shut down altogether, on account of public health measures mandated by provincial governments.

If the parties are incapable of complying with the essential terms of the contract due to circumstances beyond their control, the employer may raise the defence of ‘frustration of contract’.

Frustration of contract occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “radically different” from that which was originally contemplated by the parties at the time they entered into the contract.

The concept of frustration has not been applied in the context of a global pandemic. However, we can expect employers to raise the defence of frustration, or similar arguments, to justify their actions and avoid payment of constructive dismissal damages.

While the courts have not yet weighed in on the issue in the context of COVID-19, we suspect that whether such defence has any merit, may depend on a variety of factors, including among other things, the length and type of restriction imposed on the business, whether the employee continued to perform the essential duties of their job, and the impact of public health measures on the employer’s operations.

Regardless of whether the reduction is temporary or permanent, generally, if you do not agree with the pay reduction, you may have a variety of options available, including claiming a severance package. However, before taking any actions including resigning from your job, consult with an employment lawyer about your rights and remedies, if any.

[1] Hamilton & Olsen Surveys Ltd. v. Otto, 1993 ABCA 233 (CanLII)

[2] Pavlis v. HSBC Bank Canada, 2009 BCSC 498 (CanLII)