Constructive Dismissal during the Covid-19 Pandemic
Update by Erin Brandt, Cofounder and Angie Sung, Lawyer
The Covid-19 pandemic significantly disrupted many industries, prompting employers to reduce hours, cut pay or implement mass layoffs. These actions raised important legal questions about constructive dismissal and entitlement to termination pay.
In Escobar v Ocean Pacific Hotels Ltd., 2024 BCSC 1575 (“Escobar”) the British Columbia Supreme Court found that a cessation of work hours due to the pandemic amounted to a breach of a fundamental term of the employment contract.
Background
In March 2020, the Covid-19 pandemic caused a dramatic decline in the travel industry. Open Pacific Hotels Ltd., which operates the Pan Pacific Hotel (“Pan Pacific”), faced an overnight plummet in business, and responded by laying off salaried employees and ceasing to schedule hourly-paid staff. Only a small number of employees continue to receive work.
A class action was filed against Pan Pacific on behalf of regular hourly employees who stopped receiving regular shifts on or after February 20, 2020 and never resumed them. This class excluded on-call or casual employees and those who resigned or retired voluntarily. Romuel Escobar, a regular hourly employee, served as the representative plaintiff in this action.
Mr. Escobar, on behalf of the class, argued that:
Pan Pacific unilaterally altered a fundamental term of their employment contracts by abruptly and indefinitely ceasing to assign shifts, constituting constructive dismissal;
Pan Pacific misled employees about their future employment prospects, breaching its duty of good faith and honest performance;
Class members were entitled to:
o a lengthened notice period due to the pandemic’s economic impact;
o damages for lost earnings during the period Pan Pacific misled them; and
o punitive damages for Pan Pacific’s reprehensible misleading conduct.
Decision
Common Issue 1: Did Pan Pacific fundamentally change a term of the class members’ contracts by cancelling their hours due to the Covid-19 pandemic?
The Court looked at Mr. Escobar’s employment contract which stated that “assignment of hours will be subject to business demand, and may be increased or reduced due to seasonal fluctuations”. Most class members had similar provisions in their contracts.
While the contract allowed for variability in hours, the Court found that it did not authorize an indefinite reduction to zero. Historical events such as SARS, the 2008 financial crisis, and 9/11 had not led to such drastic measures.
The Court emphasized that interpreting the contract to allow indefinite layoffs would unfairly shift the financial burden of the pandemic onto employees. The Court was not prepared to accept an interpretation that would exacerbate the power imbalance between employees and employers.
In short, the indefinite and lengthy cessation of hours was a fundamental breach of the class members’ employment contracts.
Common Issue 2: Were class members entitled to an increased notice period due to the pandemic?
The Court considered expert evidence on the pandemic’s impact on the hospitality job market and concluded that class members who proved constructive dismissal were entitled to extended notice periods due to the difficulty of finding alternative employment. However, this did not apply where employment contracts contained enforceable termination clauses that displaced the common law presumption of reasonable notice.
Common Issue 3: Did Pan Pacific intentionally mislead class members about their prospects for ongoing employment?
The Court found that Pan Pacific’s communications to its employees did not create a misleading impression about job security. As such, it was not necessary to determine whether the communications were deliberately or intentionally misleading.
Common Issues 4-6: Was there a breach of the duty of good faith and honest performance which justified damages?
Since the Court found the communications not misleading, the Court concluded that Pan Pacific’s conduct could not amount to a breach of its duty of good faith and honest performance towards class members. Consequently claims for damages were dismissed.
Key Take Away for Employees
Escobar reaffirms recognition of the inherent power imbalance in favour of employers and emphasizes that this imbalance should be considered in the development of the law. While an employer may have some discretion to make changes to an employee’s work conditions, such changes must be within the parameters of the contract and past practice. Even where there is no intention to repudiate an employment contract, a unilateral layoff or cessation of work by an employer is, absent agreement to the contrary, a substantial change in employment.
This type of substantial change may be considered a breach of a fundamental term of employment, leading to a finding of constructive dismissal and compensation to the employee.
Key Take Away for Employers
Escobar reminders employers to exercise caution when making substantial changes to employment terms. Such changes may require advance notice or the employee’s express consent.
Escobar also reaffirms that a well-drafted employment contract with a valid termination clause can limit liability, even during extraordinary events like a pandemic.
