Demotion After Mat Leave = Aggravated Constructive Dismissal

McFarlane v. King Ursa Inc., 2025 ONSC 3553, provides a strong example of the risks to employers of demoting employees and mishandling returns from maternity leave. The decision found that an employer constructively dismissed a senior executive through a demotion and pay cut. Significantly, the Court awarded a substantial notice period (12 months for four years of service), and moral/aggravated damages for “unduly insensitive conduct.”

McFarlane provides a strong precedent for the justification of moral damages in the context of a constructive dismissal claim. Demotions can, and often do have a profound impact on an employee’s sense of self-worth and self esteem. It also provides an example of the disproportionate notice periods vis-à-vis length of service that can be awarded to executives.

Facts

The following is a summary of the key facts:

• The plaintiff was a senior executive at the Defendant advertising company.
• She began as a Director of Analytics in or about 2019, and was quickly promoted to Vice-President, then Senior Vice President between 2020 – 2021.
• The Defendant deferred the Plaintiff’s request to return from maternity leave twice. During her leave, the Defendant openly discussed the possibility of providing her a severance package.
• Subsequently, it provided her with a letter that served to demote her to her previous position and reduce her compensation by $90,000.
• The Plaintiff did not accept the demotion and pay cut and resigned.

Analysis / Conclusion

Unsurprisingly, the Court quickly found that the plaintiff had been constructively dismissed. While employers retain the contractual right to implement operational changes that can vary roles and responsibilities, significant demotions that involve a loss of prestige, status, and authority are fundamental alterations of the employment agreement, and hence, constructive dismissal. When paired with a significant pay reduction, which on its own was likely sufficient, the two alterations made this a very clear case.

As noted, the Court found that the Plaintiff was entitled to 12 months of notice. In addition to the common factors of age (this was not clear in the decision), and character of employment, the Court found that the determining factor was the lack of available positions – relying on the plaintiff’s mitigation efforts as demonstration.

The Court went on to award $40,000 in moral damages. Part of the Defendant’s argument was that the letter provided to the Plaintiff was not intended to include an offer for a demoted position. It argued that this was a typo, or “word processing error.” The Court found that even if this were the case, an employer is responsible for the documents that it provides to its employees. It went on to note that presenting such a document to a vulnerable employee returning from maternity leave, recently having purchased a new home, was callous, and unduly insensitive.

The Court concluded that the Defendant owed a duty to craft the agreement carefully and, by failing to do so, caused mental distress for which compensation was warranted.

My Take

While McFarlane is an Ontario decision, it could serve as a persuasive authority in Alberta.  McFarlane supports a strong foundation (particularly for us plaintiff-side lawyers), for the following arguments:

• The length of service for short-tenure employees should not overwhelm the Bardal One of the most critical considerations is the availability of comparable employment. Senior Executives face difficulty locating comparable positions, regardless of their tenure with the dismissing employer.

• While any demotion is significant, it is more significant where the role involves leadership status. This results in more visibility and a clearer example of loss of authority/prestige.

• While the notice period should be determined at the time of termination, evidence of the lack of comparable positions helps strengthen a plaintiff’s argument for more notice. Mitigation efforts and evidence can be used both to demonstrate reasonable mitigation and to justify an extended notice period.

The section on moral damages only cites the unjustified demotion as the catalyst for moral damages.  In Alberta, while employees and plaintiff-side counsel can hope, I am doubtful that a Court would be willing to award aggravated damages for a demotion in isolation.  That said, I suspect that the plaintiff’s circumstances and heightened vulnerability were factors in the decision (having just returned from maternity leave, caring for a young child, and recently purchasing a home). This aligns with the principle that aggravated damages are justified where the employer reasonably could have foreseen that the manner of termination or breach would result in mental distress.

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