Unilateral Changes to the Employment Contract: Ontario Court of Appeal Changes the Legal Test

In the recent decision of Wronko v. Western Inventory Service Ltd., the Ontario Court of Appeal muddied the waters with respect to an employer’s obligations when seeking to unilaterally modify an existing employment contract.

Wronko had been employed by Western Inventory for seventeen years. When a new company President was appointed, the President asked Wronko to sign an amendment to his employment contract that reduced his severance pay entitlement from two years to thirty weeks. When Wronko refused, the President gave him formal notice that, after two years, the amendment would be unilaterally imposed. Wronko continued to object to the change. After two years, the President indicated that the amendment had taken effect and that, if Wronko refused to sign the amended agreement, he would not have a job. Understanding his employment to be terminated, Wronko did not report for work and sued his employer for wrongful dismissal.

The trial judge found that an employer is allowed to unilaterally change a fundamental term of an employment contract as long as the employee is given reasonable notice of the change. The judge concluded that Wronko had terminated the employment relationship by refusing to continue to work under the new terms, and dismissed his claim.

The Court of Appeal overturned the trial judge’s decision. In its reasons, the Court explained that three options are available to an employee when his or her employer unilaterally amends a fundamental term of the employment contract:

1. The employee may accept the change, and his or her employment will continue under the new terms;

2. The employee may reject the change, take the position that he or she has been constructively dismissed, and sue for damages; or

3. The employee may demonstrate that he or she is rejecting the change but continue to work. In that case, the employer may respond in one of two ways: the employer may terminate the employee with proper notice and offer re-employment on the altered terms, or the employer may allow the employee to continue to work, in which case the employee is entitled to insist on the terms of the original contract govern.

The Court of Appeal held that Wronko’s situation fell into the third category and, since the employer did not terminate Wronko and offer him re-employment on the new terms, it must be deemed to have accepted that the original contract would remain in effect. Since the Court considered the President’s final communication to Wronko to be a termination, it awarded Wronko two years pay in lieu of notice, in accordance with the terms of his original contract.

Prior to this decision, employers could make unilateral changes by providing advanced reasonable notice of the change, and at the end of the notice period, the change was effective. The Court of Appeal now requires an employer to terminate the employee at the end of the notice period, and offer re-employment under the new terms for the change to be enforceable. We are of the view that the Court of Appeal’s decision is incorrect and creates an overly legalistic approach to a simple issue. Unfortunately, the Supreme Court of Canada has refused to intervene and has denied the employer’s leave to appeal. Time will tell whether this decision will become a precedent requiring the intervention of the Supreme Court to rectify.