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Revisiting unilateral amendments to employment contracts and policies

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In the modern business world, employers are required to stay current and adapt to ever-changing legal and economic demands.  As part of the survival process, employers are often tasked with updating work-related documents.  However, there are legal repercussions associated with unilateral amendments to pre-existing employment contracts and policies which employers must be cognizant of.

The following is a brief overview of recent legal developments addressing such unilateral amendments, which I hope will provide some guidance to employers as they navigate this seemingly ambiguous process.

Employee Rights in the Face of Proposed Unilateral Amendments

When attempting to unilaterally amend the fundamental terms of an employment agreement, employers must be wary of their employees’ legal rights, as well as the associated legal repercussions.  In the seminal decision of Wronko v. Western Inventory Service Ltd., 2008 ONCA 327, the Ontario Court of Appeal specified that an employee has three options when faced with such proposals:

  1. the employee may accept the change in the terms of employment, either expressly or implicitly through apparent acquiescence, in which case the employment will continue under the altered terms;
  2. the employee may reject the change and sue for constructive dismissal if the employer persists in treating the relationship as subject to the varied term; or
  3. the employee may make it clear to the employer that he or she is rejecting the new term and insisting on the original terms of employment.

Accordingly, in addition to justifiable resistance and potential claims for damages arising from breach of contract, employers must be alert to the possibility of claims for termination entitlements arising from assertions of constructive dismissal.  In Potter v. New Brunswick Legal Aid Services, 2015 SCC 10, the Supreme Court of Canada applied a two-part test to the determination of whether an employee had been constructively dismissed:

  1. Does the unilateral change constitute a breach of the employment contract that substantially alters an essential term therein?
  2. Is the breach sufficiently important such that a reasonable person in the shoes of the employee would have felt that the essential terms of the contract were substantially changed?

The Distinction between Fundamental and Minor Amendments

As evidenced above, claims for constructive dismissal require proof that a contemplated amendment constitutes a substantial change to an essential term of the employment relationship.  Substantial changes typically involve significant amendments to such terms as an employee’s compensation, working conditions and employment-related responsibilities.

Conversely, minor changes will not typically trigger the constructive dismissal doctrine.  The Ontario Superior Court of Justice recently confirmed in Chapman v. GPM Investment Management, 2015 ONSC 6591 that an employer has the authority to make such changes (presumably, to allow businesses to adapt their practices to ever-changing environments) without facing liability for constructive dismissal:

If a change is minor or if the change reflects a proper interpretation of an existing provision of an employment contract, the employee may not consider such a change to be an act of repudiation.  In fact, in some cases a minor breach will entitle the employee to sue for damages, but will not enable them to repudiate the entire contract.

Accordingly, employers are generally entitled to make unilateral amendments to employment contracts and workplace policies[1], when such amendments are reasonable and minor.  That being said, to enhance the prospect of relying on the amendments, employers should make every effort to communicate the changes in advance to their employees, as well as advise them of the potential repercussions of non-compliance.

The Relevance of Variation Clauses 

The authority of employers to make unilateral changes to the terms of employment is often enhanced when the employment agreement contains a variation clause that permits such modifications.  In Farber v. Royal Trust Co., [1997] 1 SCR 846, the Supreme Court of Canada confirmed that an employer has discretion to make changes to an employee’s position as part of the employer’s managerial authority, when such changes are allowed by the employment agreement – the extent of the discretion will depend on the specific terms contained therein.

In Potter, supra, the Supreme Court of Canada further commented on this notion in the process of articulating the two-part test for constructive dismissal:

At the first step of the analysis, the court must determine objectively whether a breach has occurred. To do so, it must ascertain whether the employer has unilaterally changed the contract. If an express or an implied term gives the employer the authority to make the change, or if the employee consents to or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach. If so, it does not amount to constructive dismissal. Moreover, to qualify as a breach, the change must be detrimental to the employee. [Emphasis Added]

Notwithstanding these seemingly all-encompassing assertions, employers would be ill-advised to expect that a variation clause will completely shelter them from all scrutiny.  Specifically, the Ontario Court of Appeal in Belton v. Liberty Insurance Co. of Canada, [2004] 189 OAC 173 (Ont. C.A.) suggests that courts retain an over-arching discretion to scrutinize such clauses, particularly in the context of fundamental unilateral amendments:

Whether the courts should develop the common law to place a duty on employees to affirmatively acknowledge an employer’s right to make unilateral changes to the terms and conditions of their employment, even where such right is granted by contract, must be determined according to the policy considerations that animate employment law…MacPherson J.A. in Ceccol v. Ontario Gymnastic Federation, [2001] 55 O.R. (3d) 614 (Ont. C.A.) recapitulated that the common law should be interpreted to protect vulnerable employees.  [Emphasis Added]

Accordingly, while an express variation clause will enhance an employer’s defence in claims for breach of contract and constructive dismissal, courts appear to retain some discretion to apply the doctrine of constructive dismissal nonetheless.  At the very least, in those circumstances, courts will extensively scrutinize such matters as:

  • whether the variation clause and its consequences were brought to the employee’s attention;
  • whether the proposed amendment falls within the ambit of the variation clause; and
  • whether the variation clause is overly generalized and ambiguous.

Employee’s Consent vs. Fresh Consideration

In Wronko, supra, the Ontario Court of Appeal suggests that obtaining an employee’s consent to any proposed amendment will stave off claims for constructive dismissal and allow the employment relationship to continue under the altered terms.  The Ontario Court of Appeal similarly endorsed this notion in Belton, supra:

On the other hand, if the employees acknowledge an employer’s changes and continue to work, they will be taken to have condoned the changes and will no longer be able to claim constructive dismissal if they are dissatisfied with the new terms and conditions of employment.

Although obtaining employees’ consent to fundamental amendments may assist in the avoidance of subsequent assertions of constructive dismissal, the legal enforceability of the amendment – specifically, the employer’s ability to rely on the amendment as part of the employment contract – is a somewhat separate issue.

In that regard, the need for “fresh consideration” has long been recognized as a requirement to the enforceability of contractual amendments.  A recent decision of the Ontario Court of Appeal, Holland v. Hostopia.com Inc., 2015 ONCA 762, illustrates the consequences of unilaterally amending fundamental terms of an existing employment contract.  In that case, the Ontario Court of Appeal referred to the judgment in Hobbs v. TDI Canada Ltd., [2004] 192 OAC 141 (Ont. C.A.), and re-confirmed the need for “fresh consideration” when employers purport to amend employment agreements and introduce new material terms.

There has been some confusion as to whether the decision in Wronko, supra suggests that unilateral amendments to existing contracts may be enforceable without “fresh consideration” as long as the employee consents or acquiesces to the changes. In Fasullo v. Investments Hardware Ltd., 2012 ONSC 2809, the Court acknowledged having difficulty reconciling the two seemingly distinct lines of authority.  However, in that case, the Court appears to have suitably distinguished between the concepts of (i) avoiding employee claims for constructive dismissal as a result of the amendment, and (ii) the employer seeking to rely on the amendment in subsequent termination proceedings.  In the latter circumstance, the Court seems to suggest that “fresh consideration” must always flow from the employer at the time it seeks the substantive amendment.

Providing Reasonable Notice of Change

Under the third option proposed by the Court of Appeal in Wronko, supra, if negotiations fail and an employee refuses to accept the proposed amendment, the employer has two options to minimize the risk of subsequent claims for constructive dismissal:

  • the employer may respond to the employee’s rejection by terminating the employee with proper notice (or payment in lieu thereof) and offering re-employment on the new terms; or
  • the employer may provide the employee with clear notice (equivalent to or greater than the employee’s notice of termination entitlement) that (i) the change will be implemented, and (ii) the employee will not be permitted to continue in their employment under the existing terms at the end of the notice period (this option was endorsed by the Ontario Divisional Court in Kafka v. Allstate Insurance Company of Canada, 2012 ONSC 1035).

The Court of Appeal in Wronko, supra warns that if the employer permits the employee to continue to fulfill his or her job requirements in the face of that employee’s rejection of the proposed amendments, then the employer may be found to have acquiesced to the employee’s rejection, and the employee will be entitled to subsequently insist on adherence to the existing employment terms.

Employer Takeaways

To minimize the legal repercussions associated with unilateral amendments to employment contracts and policies, employers are encouraged to:

  • Draft Variation Clauses: Although not fool-proof, variation clauses will support an employer’s claim that the contemplated amendment was permitted by the employment contract.
  • Seek Employee Consent: Written and informed employee consent to proposed amendments will minimize the risk of successful constructive dismissal assertions.
  • Provide “Fresh Consideration”: If proposed amendments impact substantive employee rights, employers are encouraged to provide the affected employees with “fresh consideration”.
  • Provide Reasonable Notice of Change/ Termination: As a general rule, an employee should be given advance notice of all proposed amendments. Where the employee rejects the change, notice of termination with an offer of re-employment on the new terms and conditions is possible; however, employers might also consider providing notice of the contemplated amendments (along with the express declaration that the employee may not continue under the existing employment terms at the end of the notice period) for a duration that is equivalent to (or greater than) the employee’s termination entitlements.

Titus Totan

About the Author: Toronto employment lawyer Titus Totan supports both employee and employer clients in all areas of employment law, including employment standards, contractual and implied obligations, terminations, workplace investigations and workplace human rights.

[1] The enforceability and contractual nature of workplace policies is a beast of its own.  For the purposes of this piece, I have assumed that workplace policies are properly binding and form part of the employment agreement.