By: Stanis Xavier

Compensation is a topic that strikes at the core of an employment contract. Of course, the main reason people take on full-time work is to get paid, but employers also need flexibility to adapt to economic challenges.  

Therefore, the legality of a pay cut will depend on how substantial the cut is to the employee. A significant salary reduction is usually treated as a fundamental breach of contract, which allows an employee to sue for constructive dismissal and seek severance pay. 

What is Constructive Dismissal?

Constructive dismissal occurs when the employer has not directly fired the employee, but instead has failed to comply with an essential term of an employment contract. This forces the employee to resign, by making significant changes to their terms of employment and creating a hostile workspace.

Under Ontario’s employment standards, a pay cut of 20% or more is considered a constructive dismissal. When this happens, employees have three options:

  • Accept the change
  • Treat it as a constructive dismissal which will trigger termination entitlements 
  • Test this change for a short period of time before deciding between the two options above

There are risks however if you choose to treat this as a constructive dismissal. Firstly, if the time off is temporary, the claim is not likely to succeed. Secondly, there is a common law duty to mitigate damages. If you view the wage reduction as a dismissal, you will be prompting your notice requirements. After termination, the employer is often required to provide you with a notice period. A notice period is the length of time that your employer knows of your departure before you actually leave. Mitigating damages may entail working part-time with the employer to ensure that steps are taken to alleviate losses. By the end of this period, there is the risk that you may join the thousands of unemployed across Canada.

Discrimination Issues

Employees should also take note that a wage reduction is never permitted in the following scenarios:

  • If the decision is made on a discriminatory basis;
  • If the employee’s pay is dropped to below the minimum wage;
  • If the employee does not receive notice of the wage reduction prior to cutting the employee’s salary; or
  • If the employment contract specifically states that the wage cannot be cut and the employer fails to renegotiate the contract

In the event where the pay cut is a result of reduced hours, it may be considered as a layoff depending on provincial and federal laws. 

It is important to note that the previously mentioned circumstances apply to the employee’s base pay. Cuts to supplemental benefits, such as healthcare and vacation, or variable pay, such as bonuses, is unlikely to result in liability.

What to do if your salary is being reduced? 

It is important to ensure that your employer can confirm in writing that this salary reduction is temporary. You may also wish to ask if they would be willing to offer retroactive pay at the end of the fiscal year if profits have not declined.

While your rights have not been affected by the current pandemic, Canada’s labour market has. Thus, it can become challenging to obtain alternative work opportunities if you treat the salary reduction as constructive dismissal. 

How MyOpenCourt Can Help

The legality of cuts to wage rate or the number of hours can be very confusing in the employment law context.

Fortunately, MyOpenCourt’s wage cut tool can help! With just a few questions, we can determine the legality of the wage cut and empower you with the information to build your case.

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