Ex-Employee Granted $800,000 in Constructive Dismissal Case

Howard A. Levitt   
Workplace

Lawrence Doran was a “lifer.” He had spent his entire working career with Ontario Power Generation (OPG) formerly Ontario Hydro. A 30-year veteran, his earnings approximated $400,000 per year. However, in late 2003 and early 2004 his work world collapsed.

The Ontario government fired OPG’s board of directors, CEO, COO, and several senior executives. As a result, the reporting hierarchy changed, projects were suspended, and adverse changes were made to senior management’s compensation levels.

As vice president, business development, Doran’s duties were to identify and develop new business for OPG. However, the Manley Report recommended that OPG should shift its focus and withdraw from wind power, solar, biomass, and small hydro projects, which largely eliminated Doran’s responsibilities.

Doran  approached several superiors seeking clarity about his position. Although his own superior told him that he would be “underutilized for the foreseeable future,” his persistence culminated in a meeting with CEO Richard Dicerni. Doran testified that Dicerni told him that if he did not agree with the changes he could resign or retire. Upon hearing this, Doran resigned, three-and-one-half months after the changes were put into effect.

Justice Maureen Forestell of the Ontario Superior Court, relying upon the Farber decision of the Supreme Court of Canada (Farber v. Royal Trust Company [1996], S.C.J. No. 118), defined constructive dismissal as occurring when the essential terms of an employment agreement are substantially changed.

Remuneration
In 1995, Ontario Hydro introduced the Performance Achievement Plan (PAP). Bonuses would be granted based on the performance of the company, business unit, and individual. Participation was optional and materials promoting the PAP stressed the potential to earn up to an additional 40 per cent of base salary. Ontario Hydro’s board had the right to suspend or amend the PAP. However, Doran believed that the board could not do this without replacing it with something of equivalent value.

When OPG was created in 1999, the PAP was replaced with the Annual Incentive Plan and the Long-term Incentive Plan to fulfill OPG’s promise to increase executive compensation to market rates. However, the documents that provided OPG the right to eliminate or change the plans were not provided to Doran.

The judge accepted that OPG made various representations to its employees about the intention to move its overall remuneration to market rates. This created an implied term in the employment contracts that remuneration would remain competitive and would either stay the same or increase. Knowing that Doran’s overall remuneration would have decreased by a factor of 14 to 17 per cent in the following year, she found that this was a breach of contract. She also found that, even if he had been aware of the clause permitting OPG to terminate the bonus, it was subject to an understanding that it would have to be replaced by other forms of remuneration in order to continue to meet market levels.

Notably, Justice Forestell found that an increase of this magnitude was not sufficient to constitute a constructive dismissal, and would only amount to a breach of contract — permitting him to sue for damages — if he had not resigned.

Demotion
The court found that there was no articulable plan to keep Doran engaged. Although OPG’s witnesses, Dicerni and Jake Epp, argued that he had much to keep him busy, they did not advise him of that during their discussions.

Although skeptical of the financial crisis pleaded by OPG, the court stated that financial circumstances or corporate reorganizations do not excuse a breach of contract. The court found that the reduction in remuneration and duties constituted a constructive dismissal and awarded Doran 24 months pay.

Duty to mitigate
There are two remaining points that are being appealed. The first is whether Doran had an obligation to remain an employee throughout the 24-month notice period as part of his duty to mitigate.

The Mifsud case of the Ontario Court of Appeal (Mifsud v. MacMillan Bathurst Inc. (1989), 28 C.C.E.L. 228) found that, if relations are not acrimonious and salary is not impacted, an employee would have to mitigate by continuing to work. The judge found that Doran’s overall remuneration was affected and would likely be further affected since, with cut duties, his bonuses would likely be reduced. It was not incumbent upon an employee to “wander around the employer’s premises exploring ‘the possibility’ of a different position” by way of mitigation, particularly for a lower and uncertain remuneration.

Pension
The second issue is the impact of pension losses or gains. If the plaintiff had been employed for 24 more months, the value of his pension would have been worth approximately $180,000 more. However, since he opted for early retirement, he received approximately $300,000 in pension during those two years. Over the period of notice, he had an increase of $120,000 in pension. The defendant is applying for that reduction. However, if the pension is viewed as deferred compensation, particularly since it was a contributory plan, then it should not be reduced and the plaintiff should receive the $180,000 increase. The plaintiff is appealing for that additional $180,000.

Learnings from this case:

1. Do not assume that a reduction in remuneration is a constructive dismissal; and

2. If you have a policy providing the right to terminate a plan at any time, ensure that the policy states that it need not be replaced by any other form of remuneration.

This articled appeared in the March/April 2008 edition of  Workplace.

Howard A. Levitt, Counsel, Lang Michener LLP, is the author of Canada's leading dismissal text book, The Law of Dismissal in Canada and editor-in-chief of the national law report, The Dismissal and Employment Law Digest. Howard provides his clients with preventative advice on all aspects of employment law, labour law, and human resource litigation. Contact Howard at hlevitt@langmichener.ca or via his direct line at 416-307-4059