Beware The Administrative Suspension with Pay! It May Result in a Successful Constructive Dismissal Claim

March 2015

Article by: Julie Menten

In a recent decision of the Supreme Court of Canada – Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 – the majority concluded that where the terms of an employment contract do not include the authority to place an employee on administrative suspension and the suspension is not reasonable or justified, the result may be a constructive dismissal, entitling the employee to damages in lieu of notice of termination.

Background facts

In 2006, David Potter, a lawyer, was appointed for a seven-year term as the Executive Director of the New Brunswick Legal Aid Services Commission (the “Commission”), which was led by a Board of Directors (the “Board”). Potter’s appointment was governed by the Legal Aid Act, which permitted appointments to be revoked for cause.

In the spring of 2009, Potter and the Board started to negotiate a buyout of his contract. In October 2009, Potter’s physician advised him to take time off work for medical reasons. Prior to the end of his leave, the Board decided that if the buyout negotiations with Potter were unsuccessful, it would request permission to revoke Potter’s appointment for cause. Potter was unaware of this decision.

On January 11, 2010, the Board recommended that Potter be dismissed for cause. On that same day, the Commission replaced Potter and advised him that he would continue to be paid, but was not to return to work until he received further direction. When Potter asked for clarification, he was told only that he was not to report to the workplace until further notice.

Two months later, Potter commenced an action for constructive dismissal. On that date, the Board took the position that Potter had resigned and stopped his salary and benefits. The trial judge found that the Board had the statutory authority to place Potter on an administrative suspension with pay and the act of doing so did not constitute a constructive dismissal. A unanimous Court of Appeal agreed, finding that the Board’s discretion to supervise Potter included the power of administrative suspension. The Court of Appeal considered it significant that Potter continued to be paid his full salary and provided his benefits during the period of the suspension.

Supreme Court of Canada weighs in

The Supreme Court of Canada disagreed with the lower courts. The majority reviewed the law of constructive dismissal, stating that where an employer’s conduct shows an intention to no longer be bound by the employment contract, the employee only has two choices: to accept the change or treat the change as a repudiation of the contract and sue for constructive dismissal, entitling the employee to damages in lieu of notice if successful.

There are two ways to prove constructive dismissal. The first is the “breach of contract” test, which has two parts: the first part is to identify the express or implied term of the contract which has been breached; and the second part is to determine whether the breach was sufficiently serious so as to constitute a constructive dismissal, the question being one of degree. The second way is the “cumulative past acts” test in which the employer’s cumulative past acts reasonably show that it no longer intends to be bound by the contract.

In cases of administrative suspension, it is generally the “breach of contract” test which applies. The burden of proof is, however, modified. While typically it is the employee who must show that there has been a breach of an express or implied term of the employment contract, in administrative suspension cases, the burden shifts to the employer to show that the suspension is explicitly authorized or is reasonable and justified.

An administrative suspension will be authorized if it is explicitly permitted in the employment contract. Where it is not explicitly permitted, the employer must show that the power of administrative suspension implied in the contract is both reasonable and justified. Reasonableness requires that the employer show, at a minimum, that it acted in good faith and was forthright with the employee and the duration of the suspension had a minimal impact on the employee. Justification requires that the employer provide evidence that the administrative suspension was, for example, a result of financial difficulties, a shortage of work or technological change. If the employer cannot show that the administrative suspension was reasonable and justified, a breach of the contract will be established.

The Commission argued that the suspension was implicitly authorized and reasonable and justified as Potter continued to be paid and an employer is not obligated to provide an employee with actual work for his or her pay. The majority disagreed, concluding that the employer does not have an unfettered discretion to withhold work. The majority highlighted that work is considered to be one of the most fundamental aspects of a person’s life, providing not only monetary and reputational benefits but a sense of identity and self-worth.

In Potter, the majority found there was no express grant of the power of administrative suspension in the contract. The majority also found the Commission failed to show that the administrative suspension was reasonable, as it was for an indefinite duration, and failed to show that it was justified, as the Commission breached its duty to act in good faith by its utter lack of communication and withholding the reasons for the suspension. With respect to the second step of the “breach of contract” test, the majority held that a reasonable person in Potter’s situation would have felt the breach was substantial. Of interest, the majority observed that where the breach is an unauthorized administrative suspension, a finding that the breach is a substantial change is inevitable. Potter’s unauthorized administrative suspension thus amounted to a constructive dismissal entitling him to damages.

Of note, the Commission’s utter lack of communication with Potter while he was suspended was one of the most significant factors in the majority’s finding that the administrative suspension was unjustified.

Lessons for employers

Employer conduct matters – There are several legitimate business reasons that an employer may impose an administrative suspension. Administrative suspensions are often used when an employer investigates allegations of bullying or harassment or misconduct towards another employee. Employers are frequently faced with decisions as to how to protect all of the parties’ interests during the investigation process. Potter highlights the importance of an employer’s conduct during this process, even where the suspension is with pay.

Communication is essential – Potter illustrates the importance of the employer’s duty of good faith for the duration of the employment relationship. This duty includes an obligation of basic communication with a suspended employee, including a requirement to provide the employee with reasons for the suspension and an estimate as to the length of the suspension.

Contractual rights – This decision also highlights the importance of a carefully drafted employment contract. Employers can protect themselves from liability by including a term which permits an administrative suspension. Had the employment contract in this case authorized an administrative suspension, Potter would not have been able to make out the first part of the two-part “breach of contract” test and his claim for constructive dismissal would have failed.