In McFarlane v King Ursa Inc, 2025 ONSC 3553, the plaintiff was a senior executive at a marketing agency who went on maternity leave after a rapid rise to an Executive Vice-President role. During her leave, the employer faced financial troubles, and other executives took pay cuts. The company twice deferred the plaintiff’s return date and even discussed a possible severance/exit package with her, which was not accepted. In April 2023, as she prepared to return from maternity leave, the employer delivered a letter cutting her salary by $90,000 (nearly a 30% reduction) and demoting her to her previous position (Associate Partner & Vice-President). The employee refused to accept the demotion and pay cut and instead resigned, treating the employer’s actions as a termination of her employment. She then sued, alleging constructive dismissal, and claimed additional damages for bad faith/moral conduct.
Legal Issues and Principles Considered
Several key legal principles were at play in this decision:
- Constructive Dismissal: Under Canadian law, a constructive dismissal occurs when an employer unilaterally makes a fundamental change to a term or condition of employment without the employee’s consent. The court noted that significant changes such as a substantial pay cut or a demotion in role can qualify as fundamental breaches. In particular, an employee’s compensation is a fundamental term of the contract, and a drastic reduction in pay fundamentally alters the employment relationship. Likewise, demoting a senior employee – especially one in a leadership role – involves loss of prestige, status, and authority, which is a serious alteration of the employment agreement. In this case, both a large salary reduction and a loss of title were imposed, which “made this a very clear case” of constructive dismissal.
- Common Law Reasonable Notice (Bardal Factors): Once a dismissal (in this case constructive dismissal) is established, the employee is entitled to common law reasonable notice damages, unless a valid contract limits this. The Bardal factors (from Bardal v Globe & Mail) guide the notice period: including the employee’s age, length of service, character of employment (position), and availability of similar employment. Although the plaintiff had only about four years of service, she held a high-level position and faced difficulty finding comparable work after termination. The court emphasized that availability of comparable employment was a crucial factor – her efforts to find a new equivalent role were unsuccessful, indicating limited opportunities in the job market for someone of her specialization. This lack of alternative employment “tipped the scales in favour of a longer term” notice period. The court thus signaled that even a relatively short-tenured executive can be entitled to a lengthy notice period if their re-employment prospects are poor, reinforcing that “the length of service for short-tenure employees should not overwhelm the Bardal analysis” and that availability of comparable jobs may outweigh other factors.
- Duty of Good Faith and Bad Faith (Moral) Damages: Employers in Canada have an obligation to act in good faith and with fairness in the manner of termination. If the employer’s conduct in terminating (or constructively dismissing) an employee is “unduly insensitive” or unfair, the court can award aggravated or “moral” damages (sometimes called bad faith damages) as compensation for the mental distress caused. The threshold for these damages is lower than for punitive damages; it is enough that the employer failed to act candidly, reasonably, or sensitively in how the dismissal was carried out. Here, the court focused on the manner in which the demotion and pay cut were communicated and implemented. The letter presented to the plaintiff effectively pressured her to “either accept its terms or leave,” which the court found to be a harsh ultimatum, especially given that she was just returning from maternity leave. The judge highlighted that an employee coming back from an extended leave is in a vulnerable position and therefore requires heightened sensitivity and professionalism from the employer when discussing any changes. Instead, the employer’s approach was viewed as callous and unduly insensitive, warranting an award of moral damages. Notably, the employer tried to argue that including a demoted job title in the letter was a “typo” or “word processing error,” but the court rejected this excuse – even if it were an error, the employer is responsible for the documents it provides, and the damage was done by presenting such a demotion to the employee. Any reasonable employee, especially a senior executive whose identity and self-worth are tied to her status, would be deeply upset by receiving a document indicating a demotion. The judge found that the demotion had “no economic basis” (the company’s cost-saving could have been achieved via pay reduction alone) and appeared gratuitous, exacerbating the harm to the employee’s dignity. In sum, the court concluded the employer breached the duty of good faith in the manner of dismissal by its insensitive handling of the situation.
Court’s Application of Principles to the Facts
Applying those principles to the evidence, the court found in favor of the plaintiff on the core issue of constructive dismissal:
- Constructive Dismissal Finding: The combination of a major salary reduction and a loss of status through demotion was ruled to fundamentally breach the employment contract. The court quickly concluded that unilaterally cutting the plaintiff’s pay by $90,000 and demoting her constituted constructive dismissal. Even apart from the legal right to reinstatement after maternity leave, these changes were so significant that a reasonable person in the employee’s position would feel the employer was no longer honoring the employment agreement. In fact, the court noted that either change on its own would be serious – a large pay cut by itself is typically enough to trigger a constructive dismissal, and a demotion (especially from an executive role) by itself also strikes at the heart of the employment relationship. Together, they undeniably forced the plaintiff to choose between accepting a humiliating downgrade or leaving, which the law treats as a termination by the employer.
- Assessment of Reasonable Notice: Having found that Ms. McFarlane was constructively dismissed, the court needed to determine the proper notice period (damages in lieu of notice). Despite her relatively short tenure (about 4 years), the court decided on a 12-month notice period, which is on the high end for that length of service. In the judgment, he explained that “aside from her age, length of tenure, and executive position, [what] struck me as the determining factor was the availability of comparable positions.” The plaintiff had been quickly promoted into a specialized senior role and evidently was a highly competent marketing analytics executive, yet after her dismissal she could only secure short-term contract work. The court inferred that she diligently sought comparable employment but could not find any, demonstrating that equivalent positions were scarce. This justified extending the notice period. This approach shows the court applying the Bardal factors with a focus on the poor re-employment prospects in her field, rather than mechanically using years of service to calculate notice.
- Moral/Bad Faith Damages for Manner of Dismissal: The judge agreed with the plaintiff that the manner in which the termination was carried out was unduly insensitive. Several aspects of the employer’s conduct were critical in the court’s eyes. First, the timing and delivery: presenting an ultimatum letter with drastic changes on the employee’s first day back (or just before returning) put her in an unfairly pressured position. She was essentially told to swallow a demotion and huge pay cut or resign — which is exactly what she was forced to do. The court found this inappropriate and insensitive, noting that such an approach fails to meet the standard of good faith required, particularly for an employee returning from leave. Second, the decision to demote her was seen as gratuitous. The employer claimed the demotion wasn’t intentional (suggesting it was a mistaken inclusion in the letter), but the judge ruled that even if it was an error, the employer must bear responsibility for it. Introducing a demoted title with no business justification (the company’s need to cut costs did not require stripping her of her EVP title) was deemed “callous and unduly insensitive” in the circumstances. The court remarked that any employee — especially a high-ranking one whose identity is closely tied to her role — would understandably react very negatively to such a demotion letter. Third, the context of her personal situation heightened the employer’s obligation to be sensitive. She was just coming off maternity leave, had a young child, and had recently bought a home. These factors made her especially vulnerable to anxiety and distress from losing income and status. The judge held that the employer ought to have crafted any proposal with greater care, and by failing to do so it caused the employee mental distress for which compensation was warranted. Consequently, the court decided to award aggravated (moral) damages. In quantifying them, the court observed that the range of moral damages in employment cases can be quite broad, and here the employer’s conduct, while not malicious, was more than a trivial mistake – it fell in the middle of the spectrum of seriousness. The court fixed the amount at $40,000 as a fair award for the bad faith manner of dismissal. This sum was meant to account for the humiliation and emotional upset the plaintiff suffered due to the insensitive handling of her termination.
Outcome and Key Holdings
Decision: The court ruled in favour of Ms. McFarlane, holding that she had been constructively dismissed by King Ursa Inc. The court’s key holdings and orders were as follows:
- Constructive Dismissal Confirmed: The employer’s unilateral imposition of a $90k pay reduction and demotion of the employee upon her return from maternity leave amounted to a fundamental breach of the employment contract, constituting constructive dismissal.
- Reasonable Notice Period (Damages): Given the plaintiff’s executive position and the lack of similar employment opportunities available to her, she was awarded damages equivalent to 12 months’ notice of termination. In dollar terms, this worked out to over $317,000 for the one-year period. (The court deducted the income she earned from interim contract work, resulting in a net award of slightly over $290,000 for the notice period).
- Moral/Aggravated Damages: The court found that the manner of termination was unduly insensitive and warranted additional compensation. It awarded $40,000 in aggravated (moral) damages for the employer’s bad faith conduct in how it handled the dismissal. This reflected the emotional distress caused by the demotion letter and the employer’s failure to be candid or compassionate in dealing with the returning employee.
In sum, the plaintiff received a total monetary award in excess of $330,000 (12 months’ salary plus $40k in additional damages, before mitigation offsets). This decision was notable for the high notice period relative to service and for recognizing the employer’s insensitive conduct with a significant moral damages award.
Broader Implications for Canadian Law
The McFarlane v King Ursa decision carries several important implications for employment law in Canada, particularly in the context of termination, maternity leave, and employer communication:
- Reaffirmation of Constructive Dismissal Principles: The case underscores that substantial pay cuts or demotions are very likely to be deemed constructive dismissals. Ontario courts will “usually treat significant pay-cuts and demotions as breaching an employment agreement”. Even in times of economic hardship, an employer cannot unilaterally downgrade an employee’s position or compensation without consent unless they are prepared to provide reasonable notice or severance. Employers should therefore be extremely cautious about altering fundamental terms of employment — financial pressures alone are not a carte blanche to violate employment contracts. If such changes are unavoidable, employers may need to offer advance working notice or obtain employee agreement (with some form of consideration) to minimize liability.
- Longer Notice Periods for High-Level, Short-Service Employees: McFarlane is a prime example that in determining reasonable notice, quality can trump quantity of service. A short tenure does not necessarily mean a short notice period, especially for senior or specialized employees. The court placed considerable weight on the availability of comparable employment in the market. This emphasis aligns with the principle that the purpose of notice is to bridge the time until new employment is found. If evidence shows an employee will likely take longer to find a comparable role (due to niche skills, senior status, or economic conditions), courts may award a longer notice to reflect that reality. Canadian employers should be mindful that even a few-year employee in a key role might attract up to 12 months (or more) of notice if their re-employment prospects are poor. This case might encourage employees (and their counsel) to present evidence of their post-termination job search difficulties to justify extended notice, and it reminds employers that Bardal factors are a holistic, case-by-case assessment rather than a strict formula based on tenure.
- Good Faith in Termination – Expectation of Sensitivity: The decision reinforces the trend in Canadian employment law requiring civility, respect, and sensitivity in the manner of dismissal. The fact that a $40,000 moral damages award was given despite the absence of outright malice signals that courts are willing to compensate employees for emotional harm caused by dismissals that are handled poorly or insensitively. Employers should draw a lesson on how to communicate major changes or terminations. The court in McFarlane effectively provides a benchmark: delivering an ultimatum or pressuring an employee to accept drastic changes is the wrong approach and can be viewed as bad faith. Instead, employers should “strive to communicate these changes in a direct, but understanding manner”, taking into account the employee’s circumstances. If an employee is in a vulnerable situation (e.g. returning from leave, dealing with family or health issues, etc.), there is a “heightened burden” on the employer to be patient, clear, and compassionate. In practical terms, this may involve having a face-to-face meeting to discuss options, providing rationale and support, allowing the employee time to consider proposals, and avoiding any humiliating surprises. The broader implication is that the manner of termination is not just a moral or reputational concern for employers, but a legal one — missteps in this area can lead to aggravated damage awards. Canadian jurisprudence, following Wallace and Keays, continues to develop by affirming that employees are entitled to be treated with dignity at the end of employment.
- Practical Guidance for Employers: This case is likely to be cited in employment law circles as a cautionary tale. For employers, one takeaway is that if financial necessity forces difficult decisions like pay cuts, those should be implemented in the least destructive way possible. For instance, the judge hinted that the company could have simply reduced the plaintiff’s salary in line with other executives and not touched her title, and it “would have been better off” doing so. By unnecessarily stripping her of a hard-earned executive title, the employer exposed itself to aggravated damages. The broader message is that employers should evaluate whether a change is truly required (is a demotion actually needed for financial reasons, or was it an avoidable mistake?), and to consider an employee’s perspective before acting.
*Always seek legal advice. The above is for information purposes only.
Stephen Dugandzic received his Juris Doctor degree from the University of Alberta in 2013 and is Calgary-based. He previously practised with Bennett Jones LLP and Taylor Janis LLP before founding YYC Employment Law Group in 2018 and Evolution Legal in 2026.