Disloyalty Allegations May Be Constructive Dismissal

What constitutes constructive dismissal?

An obvious answer is any act or acts of an employer that entitle the employee to resign and force the employer to treat that resignation as if it were a wrongful dismissal. The most common grounds for constructive dismissal that have been addressed by the courts are fundamental changes involving:

• Changes to remuneration;
• Changes to responsibilities and status;
• Demotions; and
• Geographic transfer.

But what about calling into question the loyalty and integrity of your employees? Martin J. canvassed this idea in Wilde v. Archean Energy Ltd., and found that improper employer scrutiny can, indeed, be sufficient to constitute constructive dismissal.

Perry Wilde and Donald Schott were hired by Larry Parks to work at Archean Energy Ltd. (“Archean”), a privately held oil and gas exploration and production company. The oil and gas industry is one fraught with high risk that requires not only sound judgment, but even blind luck to succeed. As part of a package to attract top talent and ensure loyalty and performance, Parks granted options to his most valued employees, including Wilde and Schott.

In early 2001, Archean decided to sell its assets. When their producing property was sold, Archean realized a profit of approximately $52 million dollars. Most of that figure was then distributed to the shareholders and option holders. For tax reasons only, the money was distributed as a loan to the option holders who pledged their options as collateral.

By the summer of 2001, the good fortune had made a turn for the worse. Oil and gas prices had dropped dramatically from an unprecedented winter high and Archean’s disappointing exploration and production results forced a significant correction in the valuation of Archean’s assets. Wilde became anxious about the value of his options and, after some reflection, decided to cash them out. Schott quickly followed suit.

When they arrived at Parks’ office to announce their decision, Parks reacted with anger and disappointment. He interpreted the move as an attempt to cash out on the basis of an appraised value of the assets which might be higher than the price that would be realized on the eventual sale of those assets. In short, Parks saw Wilde and Schott’s move as a betrayal of the company at a particularly sensitive time, so he asked Wilde and Schott to reconsider. When they refused, he announced that he would hire independent appraisers to value Archean’s assets to come up with a much lower asset value than they had anticipated.

The tone and content of the subsequent communications from Parks changed dramatically after the initial meeting. In three letters to Wilde and Schott, Parks reminded them to “act honestly and in good faith”; noted that he had concerns about the integrity, accuracy and completeness of the financial statements; and accused them of being in a conflict of interest and taking advantage of the company. Wilde and Schott responded by resigning and suing for constructive dismissal.

In his reasons, Martin J. recognized that Parks’ initial outburst at first hearing the news from his employees was spoken in anger. However, after a month had passed, Parks should have had sufficient time to assess the situation, retain counsel and develop a more professional response. By openly calling into question the loyalty, honesty and integrity of Wilde and Schott, he destroyed the trust and confidence which was the foundation of the relationship between himself and his senior executives. Each person brought vital skills and knowledge to the company and, with such a highly interdependent work environment, it was clear that they could not function without the full confidence of one another.

The Court also noted that the plaintiffs were highly respected professionals who depended on their good reputations. Parks’ attacks on their character and reputations under the guise of searching for more information was unjustified and insulting. Martin J. found that Parks would have fully expected the plaintiffs to terminate their employment and, in fact, felt they would have been justified in leaving their positions sooner than they had.

In finding that Wilde and Schott were constructively dismissed, Martin J. awarded each of them 12 months’ salary plus an additional $200,000 each in bad-faith damages for the insulting and humiliating manner in which they were treated. Most surprisingly, there were no deductions made for lack of mitigation because of the complexity of the case requiring the plaintiffs to devote a great deal of time in its preparation.

The lesson is clear: employers must exercise caution and temperance when dealing with their employees. Accusations that impugn an employee’s trustworthiness to the point of a breakdown in the relationship can be sufficient evidence for a court to make a finding of constructive dismissal.

Matthew L. Dewar is an associate in the Employment & Labour Group in Toronto. Contact him directly at 416-307-4234 or mdewar@langmichener.ca.

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