Demotion and Pay-Cut Results in Constructive Dismissal and Bad Faith Damages
August 11, 2025
| By
Brendan Egan
Summary
In McFarlane v. King Ursa Inc., 2025 ONSC 3553, the Superior Court awarded a former employee (the “Employee”) more than $290,000 in damages in respect of constructive dismissal as well as $40,000 in bad faith damages. The Employee held an important position with her Employer, but was ordered to take a pay-cut and demoted upon her return from maternity leave.
The Court’s findings in this case may be valuable for employers contemplating demotions, particularly if financial uncertainty is the basis for the same. In particular, the Court’s conclusions could inform employers on how to communicate such decisions and may also help limit liability if an employer intends to alter the terms and conditions of an employee’s employment without their consent.
The Facts
The Employee was employed by a marketing agency. The Employer encountered financial difficulties during the COVID-19 pandemic that resulted in a reduction in employee headcount. Despite this, in or around October 2021, the Employer promoted the Employee to the position of Executive Vice-President, Media & Analytics. In so doing, it also increased the Employee’s compensation by $80,000. Shortly thereafter, the Employee went on maternity leave.
Commencing in early 2023, the Employer communicated to the Employee that it was experiencing significant cash flow issues and that it was looking at ways to keep the company solvent. The other executives of the business took compensation reductions, and the Employer discussed with the Employee the possibility of her resigning her employment in return for an exit package. These negotiations failed. Subsequently, in or around April 2023, and after twice deferring the Employee’s return to work from her maternity leave, the Employer provided the Employee with a letter stating that it was cutting her pay by $90,000 and demoting her to her previous position, Associate Partner and Vice-President of Media & Analytics.
The Employee refused this demotion and resigned her employment. She in turn brought an action against the Employer.
The Issues in Dispute
The Employee alleged that by demoting her and cutting her pay, her Employer had constructively dismissed her. Ontario courts can find that an employee was constructively dismissed if an employer unilaterally alters fundamental terms and conditions of that employee’s employment. Constructive dismissal can arise when, as in this case, an employer unilaterally cuts an employee’s pay and demotes the employee. If a court determines that an employee was constructively dismissed, they may award the employee with pay in lieu of common law reasonable notice of termination.
Alongside alleging that the Employer constructively dismissed the Employee, she also claimed that it discriminated against her contrary to the protections in the Human Rights Code. She argued that the Employer’s conduct towards her was inseparable from the fact that she took maternity leave, allegedly violating the Code’s prohibition on discrimination with respect to gender and sex.
Finally, the Employee submitted that the Employer’s conduct at the time her employment ended warranted an award of punitive and/or bad faith damages. Ontario courts will only award punitive damages for conduct that is malicious, high-handed, and/or oppressive. However, a lower threshold applies for bad faith damages, with courts awarding the same where an employer’s conduct is unduly insensitive at the time it terminates an employee’s employment.
Constructive Dismissal and Bad Faith Damages
On the evidence, the Court concluded that the Employer constructively dismissed the Employee by unilaterally reducing her compensation and demoting her. While the Employee could not prove discrimination, nor that the Employer’s conduct warranted punitive damages, the Court awarded her bad faith damages because of the Employer’s behaviour, namely its decision to demote her and how it communicated that decision.
Regarding her claim that the Employer constructively dismissed her, the Court took notice of the fact that the Employer decreased the Employee’s pay and made this decrease a condition of her continued employment with the company. The Court held that the Employer’s letter setting out the new terms of employment pressured the Employee to either accept its terms or leave the Employer, which the Court noted was insensitive given her ongoing return from maternity leave. Because courts consider an employee’s compensation to be a fundamental term of their employment, and because significant pay-cuts fundamentally alter this term, the Court concluded that the Employee was constructively dismissed.
With respect to the Employee’s claimed bad faith damages, the Court found that the Employer’s decision to demote her, and its treatment of her when doing so, merited an award of bad faith damages. While the Court understood that the unilateral cut to the Employee’s salary was the Employer’s attempt to endure financial hardship, such economic conditions did not require that it also demote the Employee. The Court further stated that this management decision was insensitive given the Employee’s relative isolation from the company during her extended maternity leave, and the fact that it was presented to her as she returned from maternity leave. The Court stated that those circumstances required the Employer to conduct itself with heightened sensitivity and professionalism while negotiating with the Employee.
Altogether, the Court awarded the Employee more than $317,000 in lieu of common law reasonable notice for dismissal, from which the Court subtracted her earnings during the 12-month notice period for a total award of slightly more than $290,000. For bad faith damages, the Court found that comparable decisions, and the Employee’s treatment by the Employer, merited an award of $40,000.
Takeaways
The outcome of this case, and the facts giving rise to it, should alert employers to the ongoing need for sensitivity when making changes to the essential terms and conditions of an employee’s position. As underscored here, courts will usually treat significant pay-cuts and demotions as breaching an employment agreement. While courts will take notice of the reasons why an employer unilaterally reduces and employee’s pay, employers will face an uphill struggle to prove that they have not constructively dismissed an employee whose compensation they cut.
Similarly, the Court’s findings are also helpful on how employers should conduct themselves when communicating fundamental changes to employees. Employers should strive to communicate these changes in a direct, but understanding manner. When an employee is in a particularly vulnerable position due to circumstances in their personal life, Employers may bear a heightened burden to communicate with that employee in a sensitive and professional manner. By contrast, attempts to pressure an employee into signing a new agreement or else face termination from the company could result in a bad faith damages award as in this case.
Need More Information?
For more information or assistance with employee dismissals, contact Brendan Egan at began@filion.on.ca or your regular lawyer at the firm.
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