Thursday, April 20, 2017

Constructive Discharge

The concept of constructive discharge appears regularly in employment law cases and commentary, but we’ve found that it’s not always well understood. Because a constructive discharge can have all the consequences of a typical discharge, it’s important for in-house counsel, HR professionals, and business owners to be familiar with its legal definition and understand how and when it can create legal liability.

The Department of Labor describes constructive discharge this way:

In general, the term "constructive discharge" is when a worker's resignation or retirement may be found not to be voluntary because the employer has created a hostile or intolerable work environment or has applied other forms of pressure or coercion which forced the employee to quit or resign. This often arises when an employer makes significant and severe changes in the terms and conditions of a worker's employment….

In 2004, the United States Supreme Court wrote that the proper inquiry in a constructive discharge case is whether working conditions became so intolerable that a reasonable person in the employee’s position would have felt compelled to resign. Pennsylvania State Police v. Suders, 542 U.S. 129, 147 (2004). This standard generally guides courts in discrimination cases involving constructive discharge, and similar standards are articulated by courts deciding cases involving other claims of wrongful termination. It’s important to remember that there is no separate legal claim for constructive discharge. Recognition that an employer can force an employee to resign allows employees to claim damages as if they had been fired, but employees must still prove that their treatment violated statutory or common law.  

So when do working conditions become hostile or intolerable? Here are some examples:

Pay reduction.  Courts differ on how significant a pay reduction must be to support a claim of constructive discharge, but most decisions recognize the possibility. The Seventh Circuit ruled in Zabielski v. Montgomery Ward & Co., Inc that an income reduction from $26,000 to $10,000 a year, plus the fact that the employee’s position was scheduled to disappear in three months, was sufficient to constitute a constructive discharge. In Scott v. Harris Interactive, the Second Circuit considered whether or not a one-third reduction in salary amounted to a constructive discharge. While refusing to rule that a one-third reduction in pay automatically triggers constructive discharge, the court said that the percentage of a reduction and reasonable expectations of the parties are relevant to the determination.  

Terms and Conditions of Employment.  In a 2013 California Court of Appeals decision, the court held that an employee was constructively discharged when his employer refused to reimburse job-related travel expenses, effectively reducing his salary to below minimum wage. A New York federal court has ruled that an indefinite suspension is the equivalent of firing. Late last year, another New York federal court held that an employee was constructively discharged when she was given the choice between accepting a demotion or facing “dire consequences” for failure to meet an unrealistic sales goal. Nielsen vs. Pioneer Bank, No. 1:15-cv-623 (N.D. N.Y., 9/13/16)   In the Pennsylvania State Police v. Suders case noted above, the Supreme Court found that a hostile work environment created by sexual harassment resulted in a constructive discharge. On the other hand, being put on a performance improvement plan, being berated in front of customers, and being transferred do not support a claim for constructive discharge, and the Sixth Circuit ruled last year that an allegation of retaliation, standing alone, does not support such a claim.

Forced Resignation.  If an employee is required to resign in order to avoid being fired, he or she can claim constructive discharge. An employer cannot use a forced resignation to escape the consequences of an otherwise unlawful termination. For the employee, any perceived benefit gained by being able to claim resignation may be outweighed by the potential loss of unemployment insurance.

It’s worth noting that in many states, unemployment insurance—which is generally unavailable if an employee resigns—can be awarded if the employee is determined to have quit for a good reason attributable to the employer. In Minnesota, for example, unemployment insurance will be awarded if the employee resigns for a reason that “…would compel an average reasonable worker to quit.”

Employers should stay alert to circumstances that could give rise to a constructive discharge claim, and should make certain that terminations are properly documented, called what they really are, and handled appropriately and professionally.