Show me the money – Is an employer allowed to change your compensation plan?

Mar 7, 2016

As employees, we expect that our compensation will continue increase with our length of service. However, sometimes that’s not always the case. An employer may be experiencing financial difficulties and in an effort to cut costs, it asks its employees to take a pay cut. On the other hand, an employer could be quite profitable, but may make changes to a compensation plan as a motivational tool.

If this is happening to you, we know you’re thinking: “is my employer allowed to do this”?

It depends. Some changes to your compensation could constitute constructive dismissal. Constructive dismissal occurs when the employer imposes a unilateral change to your terms of employment that is fundamental and substantial.

Reduction in Salary

A reduction in salary needs to be significant in order to be considered constructive dismissal. Courts have generally said that less than 10% is not significant and over 20% is usually significant. In between, there is grey area and whether the salary reduction constitutes constructive dismissal will depend on whether other changes have occurred. Other changes that the Court will look at include: demotion, change in job duties, change in reporting structure, change in benefits, loss of job perks (ex. company car).

Change in Remuneration Structure

Changes to how an employee is compensated have at times been held to be constructive dismissal. For example, if an employee is changed from straight commission to straight salary or vice versa. However, modifications to how commission is calculated may or may not be acceptable. Certainly if changes are contemplated in an employment contract then the Court is generally more likely to find the changes are acceptable. The Court will also consider if the change would actually result in a reduction in earnings.

Changes to Benefits and Bonuses

Similarly, a change in benefits or bonuses may be a constructive dismissal if it amounts to a significant change. As discussed above, a change that results in a reduction in remuneration of less than 10% is unlikely to be significant enough to be considered constructive dismissal.

Each case is fact specific and the reality is that proving constructive dismissal is no easy task. It is important that an employee object to the change promptly. If you think that your employer is making changes to your compensation that could be a constructive dismissal, we would be happy to discuss your concerns with you. You should keep in mind that even if you have been constructively dismissed, you may be obligated to accept the pay reduction and continue working while you look for a new job. To speak with one of our lawyers who has expertise in this area, please contact us at [email protected] or 647-204-8107.

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