You’ve been working for the same company for decades. Business is bad lately. Your employer asks everybody to take a big pay cut. It will be hard to make ends meet on what the boss is now willing to pay, but after all these years with the same company, there aren’t many jobs out there for you. What do you do?
Lorenzo Russo took a part-time summer job with the Kerr Brothers candy company in 1972, when he was still in high school. In November of 1972, at the age of 16, he quit school so that he could begin full-time employment as a shipping clerk in the Kerr Brothers warehouse. He became warehouse manager in 1977, and he had worked continuously for Kerr Brothers for 37 years when, at the age of 53, his lifetime employer asked him to accept radically different terms of employment. He refused, and took the company to court.
In 2009, Kerr Brothers hired a new president, Fayez Zakaria, who was given the task of cutting costs in order to save the company. Kerr Brothers had been in business for more than 100 years, but had run into financial difficulty in the last decade. The company reported losses totaling $7.4 million over the previous nine fiscal years.
After examining employee salaries, Mr. Zakaria concluded that all employees, including Mr. Russo, were being paid salaries that were in excess of what Mr. Zakaria regarded as competitive in the marketplace. In April of 2009, he asked everyone to accept a 10% reduction in compensation. He also dissolved the pension plan.
At that time, Mr. Russo was employed as warehouse manager, earning approximately $115,000 a year. His base salary was $85,000 annually, but he also received an annual bonus of $30,000. In addition, he was entitled to participate in the Kerr Brother’s defined benefit pension plan, under which Kerr Brothers matched employee contributions up to a maximum of 4% of annual salary. In Mr. Rizzo’s case this particular benefit was worth about $4,500 a year.
After implementing the initial 10% cut, Mr. Zakaria determined that additional cuts had to be made if the company was to survive. He decided that four employees, including the plaintiff Russo, were paid excessive remuneration in light of their skill level and the market rates for similar positions with other organizations. He approached the four employees and asked them to accept a decrease in pay.
On July 16, 2009, Mr. Zakaria reduced Mr. Russo’s salary to $60,000 a year. The bonus was discontinued, although the plaintiff was offered a prorated bonus from January to April of 2009.
Mr. Russo retained a lawyer. On July 27, 2009, his lawyer wrote Kerr Brothers stating that Mr. Russo did not accept any of the employer’s unilateral changes to the terms of his employment contract. In the letter, Mr. Russo’s lawyer said that Kerr Brothers’ fundamental modifications to the employment agreement constituted a “constructive dismissal”. Although Mr. Russo, through his lawyer, rejected the idea that the employer was entitled to force him to accept the 45% reduction in his compensation, Mr. Russo remained an employee of Kerr Brothers, and continued to perform his duties as warehouse manager at the lower rate of pay.
In court, Mr. Russo took the position that he had been constructively dismissed by Kerr Brothers, but that he continued in his employment at the lower salary level in order to mitigate or reduce his damages. He claimed that he was entitled to reasonable notice of any fundamental changes in the terms of his employment. Given that he was 53 years of age, and had worked for the same employer for 37 years, and that he held a managerial position, he claimed he was entitled to 28 months notice of the changes in his remuneration.
Mr. Russo’s claim, then, was for the difference between his earlier earnings of $115,000 a year, and his new compensation of $60,000 a year, over the entire 28 month notice period.
The employer admitted that the changes in the terms of Mr. Russo’s employment were so fundamental that they amounted to a constructive dismissal. According to the employer, however, an employee has who has been constructively dismissed has a choice: if he leaves this employment, he can sue his employer and recover whatever income he has lost during the reasonable notice period. In this case, Kerr Brothers suggested that Mr. Russo would be entitled to 18 months notice, and if he had chosen to leave his employment, he would get 18 months’ severance, subject to whatever amount he was able to earn during that time by making reasonable efforts to obtain alternative employment.
According to the employer, when Mr. Russo elected instead to remain in his position, he impliedly accepted employment under the new contract terms, including the reduction in salary. Since Mr. Russo had elected to remain in Kerr Brothers’ employ at the lower compensation level, he was not entitled to any damages for the breach of his employment contract.
Mr. Justice Gray concluded that the issue was to be determined by applying general principals of contract law. To be effective, a repudiation of contract must be accepted by the innocent party, and the acceptance must be communicated: Lebovic Enterprises Ltd. v. Dixie Lee of Canada Inc., [2010] O.J. No. 4530 (S.C.J.). In the Lebovic case (which was the subject of the writer’s October 28, 2010 blog post Landlord Must Give Credit for Higher Rent Obtained Following Lease Termination), the Ontario Superior Court of Justice cited long-standing English authority (Howard v. Pickford Tool, [1951] 1 K.B. 419 (C.A.)), to the effect that “an unaccepted repudiation is a thing writ in water and is of no value to anybody: it confers no legal rights of any sort or kind.”
In the employment context, Kerr Brothers’ unilateral decision to reduce Mr. Russo’s rate of pay from $115,000 to $60,000 a year constituted a repudiation of the employment contract. Mr. Russo did not accept that repudiation, however, and put Kerr Brothers on notice that he insisted on full performance of the existing contract terms.
Mr. Justice Gray identified three options that are available when the employer makes unilateral changes to the fundamental terms of the contract of employment:
(1) The employee can accept the changes in the terms of employment, either expressly, or implicitly through acquiescence, in which case the employment will continue under the altered terms.
(2) The employee can reject the changes, and sue for damages if the employer persists in treating the relationship as being subject to the new terms. This situation is what is referred to as a “constructive dismissal”.
(3) The employee can make it clear to the employer that he or she rejects the new terms of employment. The employer can respond to this rejection by terminating the employment contract on proper notice, and offering re-employment on the new terms. If the employer does not take that course of action, and permits the employee to continue to work at his existing job, the employee can insist on adherence to the terms of the original contract.
In the first situation, the employee is regarded as acquiescing to the employer’s new terms, and the legal effect is that the parties have entered into a new employment contract on the employer’s terms. Under the scenario outlined in number (3) above, however, the employer is to be regarded as acquiescing to the employee’s position. The employer does not have a unilateral right to change the employment contract, and cannot force the employee to either accept the new terms or quit.
At the end of the day, the court determined that the 28 month notice period proposed by the employee Russo was too long, notwithstanding the employee’s long-standing service. He was not a senior executive, and the fact that the employer was faced with difficult economic circumstances had to be taken into consideration.
The 18 month notice period proposed by the employer was also rejected, and the Judge concluded that 22 months would constitute reasonable notice for Mr. Russo. Since the full 22 month period had not run as of the date of the summary judgment motion, the Court granted Mr. Russo summary judgment for the difference between his original rate of pay and the amount he had received from the employer since July of 2009, up to the date of the Court’s decision on the summary judgment motion.
The balance of the motion was adjourned to be brought on again and determined after the expiration of the full 22 month notice period, when it would be possible to determine how much Mr. Russo was able to earn during those additional months after making reasonable efforts to obtain alternative employment.
Link: Russo v. Kerr Bros. Limited, CanLII – 2010 ONSC 6053 (CanLII)
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