One-Third Reduction of Pay May Be Constructive Discharge

Recently, in Berkely S. Scott v. Harris Interactive, Inc., No. 12-1414-cv, the Second Circuit reversed a district court finding that the reduction of an employee’s salary by one third could not as a matter of law constitute constructive discharge or constructive dismissal.

The reversal is good for employees and requires the courts to consider adverse employment actions by employers within the context of the employee’s individual circumstances, rather than some common minimum threshold that may not reflect the economic reality for higher-paid professionals.

The plaintiff in Scott entered into an employment agreement with his former employer. Under the terms of the agreement, the plaintiff would hold the position of “SVP Global Accounts & Business Development” at a starting salary [of] $220,000 per year.” Although plaintiff’s employment was at-will, meaning either he or his employer could terminate the employment relationship at any time and for any reason not expressly prohibited by law, if plaintiff was terminated for any reason other than “cause,” he would be entitled to severance benefits. Conversely, if plaintiff resigned or was terminated for cause, he would have to return a $15,000 signing bonus he received at the time of hire.

Despite the terms of the employment agreement, plaintiff’s employer reduced his salary to $150,000 during the first year of his employment. Soon afterwards, plaintiff notified his employer that he deemed himself constructively discharged and sought severance benefits.

The parties disagreed about whether plaintiff resigned (and, thus, owed his employer the $15,000 signing bonus) or was terminated without cause (and, thus, was owed severance benefits).

The district court ruled that plaintiff’s reduction in salary by $70,000 did not constitute constructive discharge as a matter of law because “the reduced amount compare[d] favorably to the earnings of other accomplished persons in the national workforce.”

The consequence of the the district court’s line of reasoning is to raise arbitrarily the burden of demonstrating constructive discharge for professionals receiving above-average pay.

The Second Circuit disagreed with the district court’s narrow view of the law, ruling that it should also have considered plaintiff’s reduction in pay in terms of the percentage of the reduction and in terms of the parties’ reasonable expectations.

Plaintiff’s reduced salary of $150,000 undoubtedly compares favorably to the earnings of other similarly accomplished professionals, as noted by the district court. However, the Second Circuit’s ruling sensibly requires the lower courts to consider reductions of pay in the circumstances of plaintiff’s case.

Here, the Second Circuit found that sufficient questions of fact on the disputed issue of whether plaintiff was constructively discharged or resigned did exist due to the percentage by which his salary was reduced and the terms of the employment agreement, as well as other factors, including changes to plaintiff’s title and responsibilities and evidence the plaintiff’s employer repeatedly told him that he had the option to resign.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm with more than a decade of experience litigating employment class actions.