UNNECESSARY AND "INSENSITIVE" DEMOTION AFTER MATERNITY LEAVE YIELDS CONSTRUCTIVE DISMISSAL AND AGGRAVATED DAMAGES – McFARLANE V. KING URSA INC.
Recently, the Ontario Superior Court of Justice issued a ruling in the case of McFarlane v. King Ursa Inc., awarding a shortserving, executive employee 12 months' notice and $40,000 in moral damages. These awards were the result of the Court finding the employee to have been constructively dismissed when her employer asked her to accept a demotion and pay cut on a return from maternity leave. This case illustrates important legal considerations for employers when offering or altering employment contracts, particularly when an employee has been "isolated" from the company for some time.
Facts:
Joanna McFarlane was a senior employee at King Ursa, an advertising company, and was promoted twice in 2021, including to the position of Executive Vice President of Media & Analytics. This EVP position came with a significant salary increase and a greater phantom share allocation. In July 2022, Ms. McFarlane took maternity leave.
King Ursa had been experiencing financial issues since the COVID-19 pandemic began in 2020. It significantly reduced its workforce, but issues persisted into 2022 and 2023. Over the course of Ms. McFarlane's maternity leave, King Ursa requested twice that she extend her leave to provide the company some financial relief. When Ms. McFarlane was eventually set to return from her leave in April 2023, she was presented with an agreement reducing her $300,000 salary to $210,000 and demoting her from her EVP position back to the position she held prior to it. The company's explanation for offering the agreement was that it was still in the midst of financial stress.
Ms. McFarlane advised her employer that she would not be returning to work and filed a constructive dismissal lawsuit. Ms. McFarlane also claimed discrimination and alleged moral damages.
Ruling:
The Court appeared to have little issue in finding that the April 2023 agreement offered to Ms. McFarlane was King Ursa's attempt to implement a significant pay cut and demotion for Ms. McFarlane, and that this demonstrated a constructive dismissal.
The letter by which the demotion and salary reduction were communicated was found to be pressuring Ms. McFarlane to accept the new terms or else leave the company. The Court noted that the letter exceeded King Ursa's stated intent – which was just to renegotiate salary – by including a demotion, and the context did not include an invitation to negotiate salary. The Court also relied on Ms. McFarlane's vulnerable state at the time the April 2023 agreement was presented to her, accepting her evidence that with a new baby, and in the middle of purchasing a house, she felt coerced to accept the new agreement.
The Court emphasized that the financial troubles of King Ursa did not relieve them of their legal duties as Ms. McFarlane's employer. This includes the requirements to provide notice or payment in lieu of notice and to act in good faith during the termination process.
The Court awarded Ms. McFarlane 12 months of pay, noting the lack of availability of comparable positions as the determining factor. Interestingly, the Court stated: "I cannot ignore her inability to find comparable employment as a factor tipping the scales in favour of a longer term [of a notice period]". This goes against long-held jurisprudence that assessing the reasonable notice period is to be done at the time of termination, which does not permit ex post evidence to enter the equation.
Regarding King Ursa's duty of good faith, the Court found that while the intent of King Ursa was not to push out Ms. McFarlane with the changes it made to her employment contract, the inclusion of a demotion was entirely unnecessary. The goal of King Ursa's conduct was to solve their financial problems, but the Court held that the inclusion of a demotion would fail to contribute to this aim. Rather, it served to negatively impact Ms. McFarlane's sense of identity and self-esteem, and was found to be "callous and unduly insensitive". Due to a lack of malicious conduct, the Court dismissed Ms. McFarlane's claim of punitive damages. However, the Court considered the circumstances of Ms. McFarlane's isolation from the company during her maternity leave, stating that this required a need for heightened sensitivity and professionalism. Accordingly, the Court awarded Ms. McFarlane $40,000 in moral damages resulting from King Ursa's insensitivity.
The Court was unable to find that King Ursa discriminated against Ms. McFarlane for the purpose of an independent claim of discrimination, although it appeared to wrestle with the fact that the employer's attempt to implement the April 2023 agreement occurred only when she was set to return from leave.
Key Takeaway:
This decision is of assistance in understanding how courts may approach employers' duty of good faith and awards of moral damages.
As shown in this case, King Ursa's demotion of Ms. McFarlane was found to be not simply unnecessary, but to have negatively impacted her sense of identity and self-esteem, an important consideration when the Court awarded her moral damages. Accordingly, an assessment of an employee's particular vulnerability ought to be done for an employer to best understand how to meet its good faith obligation in the termination process.
Failing to do such an assessment could lead to innocent actions being deemed careless and insensitive, exposing an employer to additional heads of damages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
