Mar 25, 2020  By John Hyde

COVID-19 Layoffs - Practical Advice for Employers

There is nothing more frustrating than legal advice advanced without practicality. It is a lot like saying, "YOU CAN'T GET THERE FROM HERE". So, when we see headlines in notable and well-meaning news sources, exclaiming things like "Lawyer: Your COVID-19 layoff is likely a termination" or, "thousands of businesses may be breaking the law due to Covid-19"...", it certainly gets the blood boiling. Such statements are not practical and are definitely not in any way useful. Maybe it is a way of generating business, but no thank you; there is enough fear mongering going on right now, without any extra churning.

We represent employers across Canada. While many have different approaches to dealing with COVID-19 issues in the workplace, the one thing Human Resource leaders all agree upon is, there is not enough practical information out there for them to make day-to-day decisions and to plan for the immediate future. They do not want to be told, "you can't get there from here". They want common-sense legal advice focusing upon practical reality. If you are at that point, please read on.

Can we lay off employees due to the COVID-19 pandemic? That is the million-dollar question for many employers right now, and the uncertainty has led many companies to continue paying underworked employees for fear of the legal consequences. But companies can only continue bleeding money for so long. For some, only more extreme measures (i.e., temporary layoffs) can keep the business afloat.

Below are some practical tips for employers seeking to temporarily lay off employees in these uncertain times.

Does the employment contract permit temporary layoffs?

If the employment contract permits temporary layoffs, and the provision is enforceable, then the company has a right to do so and, that is the end of the inquiry.

Few contracts (especially those for full-time or salaried employees) are drafted to permit temporary layoffs; a situation like COVID-19 would not have occurred to most employers at the time of hire. However, the employment contract need not necessarily use the term "layoff" at all. For instance, many employees have signed employment agreements which limit their entitlements upon termination to only the minimums provided under the Employment Standards Act (the "ESA"). Those employees are only entitled to notice and severance pay where the ESA specifically requires it. Luckily for employers, only layoffs lasting more than 13 weeks are deemed to be a termination under the ESA.

Is a temporary layoff  a "constructive dismissal" at common law?

Before COVID-19, the general opinion among employment lawyers was that, absent an agreement or practice to the contrary, a temporary layoff would categorically amount to a constructive dismissal at common law.

The COVID-19 pandemic, however, is unprecedented. It may be the exception that proves the rule. The Supreme Court of Canada has held that, in evaluating whether a constructive dismissal has occurred, the court must determine "whether a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed." (Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10).

In other words, the cookie-cutter approach says this: absent an agreement to the contrary, a temporary layoff is a constructive dismissal. Does the cookie-cutter approach apply to temporary layoffs instituted as a result of COVID-19? We do not think so.

Can we cut our employees' hours or pay?

Cutting employees' hours and/or pay carries the same risks as imposing a temporary layoff; the "cookie cutter" approach says that a reduction of pay in the range of 15-20% or more will amount to a constructive dismissal. If reducing employees' hours makes sense for your business, then do it if it is necessary for the company's survival but legally speaking, this approach isn't any less risky than temporary layoffs. We suggest limiting reductions in pay below 15% if possible.

Should we ask our employees to agree to a temporary layoff or constructive dismissal?

No we advise our clients not to. For one, an agreement to accept a temporary layoff or a reduction in pay lacks consideration and is not binding at law. You may be blindsided by a constructive dismissal claim from an employee who "agreed" to be laid off. Second, asking the question invites your employees to say "no". Do not suggest to employees that the choice is theirs, unless you are prepared to follow through on that.

The above does not mean you should not speak to your employees. Your employees are one of the greatest assets to your business. They can also be one of your greatest liabilities, if they are kept in the dark or, do not feel that they are part of the process.

Is the COVID-19 pandemic a "force majeure" or an externality that leads to "no-fault" termination?

Only businesses which will close permanently should use this opportunity to terminate employees at "no fault". First, provincial governments across the country have passed legislation providing job-protected leave to certain classes of employees laid off as a result of COVID-19. Second, the doctrine of "frustration" in the employment context holds that employees can be subject to "no-fault" termination where the object of employment disappears. For instance, if a factory burns down and does not reopen, the factory workers' employment may have been frustrated. However, "frustration" only applies where there is no reasonable prospect of the business resuming operations in the future.

What can we do if an employee claims that they have been constructively dismissed by a temporary layoff?

A constructively dismissed employee has a "duty to mitigate" just like every other wrongfully dismissed employee. Courts have held that, as part of that duty to mitigate, employees constructively dismissed by a temporary layoff must return to their jobs if and when they are recalled to work. This means that, even if an employee has been constructively dismissal (a BIG "if"), the damages for that constructive dismissal will be confined to the wages that the employee has lost the opportunity of earning. That said, it may be that there are no jobs available either currently or in the near future. We do not know how long it will take for Canada to bounce back from this crisis. Are we facing a recession? A depression? Economists are mixed in their views as to the ultimate outcome. Our point is however, if you need to temporarily lay off employees in order to protect your business, it becomes a question of choice: Do you risk a potential lawsuit, or do you risk losing you business altogether?

Employers do not want to lay off employees if they do not have to. They risk losing talent. Every HR person knows this. However, if you have to lay off employees, consider things like the continuation of benefits. You must first confirm with your insurance provider, which benefits can be continued during a layoff, and for how long. However, it is a way of maintaining HR goodwill. For example, in Ontario, the continuation of benefits allows an employer to temporarily lay off employees for much longer (up to 35 consecutive weeks), without automatically triggering a termination. If financially viable, we are also suggesting that our clients consider paying the employee's share of benefit premiums, in co-pay scenarios. The last thing that laid off employees want to hear is, that their families also have no benefits.

Are temporarily laid off employees entitled to EI benefits?

Yes, provided that they are eligible. The government has also introduced certain emergency income replacement benefits for employees who are ineligible for EI, which can be found on the Government of Canada website.

Are employees with reduced hours/pay entitled to EI benefits?

No, unless the reduction results from sickness, compassionate care, maternity leave, parental leave, etc. An employee whose hours have been reduced as a result of a downturn in business, is not entitled to EI benefits.

There is, however, a notable exception to this rule. The federal government runs a program known as the "work sharing program" through EI, which provides pay to eligible employees while their employer recovers from a temporary decrease in business activity. The drawback of the work sharing program is that it takes at least 30 days for an application to be processed, and employees cannot receive the benefits until the program has been approved. Service Canada is currently dealing with an extremely high volume of EI applications (over a million new claims as of today's date), so it may take some time for a work-sharing program to be approved.

Can we top up our employees' EI benefits?

Yes, but the company will need to register a Supplementary Unemployment Benefit Plan ("SUBP") in order to ensure that these payments are not clawed back from the employees by Service Canada.  A SUBP can apply to employees who are laid off due a temporary stoppage of work, illness, injury, quarantine, or training.

Unlike the work sharing program, a company can register a SUBP and begin paying top-up benefits immediately. A SUBP may be registered by completing the forms on Service Canada's Website and submitting them by mail. Assuming your SUBP plan is approved, any benefits paid under the SUBP after the registration date will not be clawed back by Service Canada.

A SUBP may provide a top-up of up to 95% of the employee's pre-layoff wages. For this reason, a temporary layoff combined with an approved SUBP can almost eliminate any incentive for your temporarily laid-off employees to claim constructive dismissal.

If you are contemplating layoffs, reach out to a qualified labour and employment lawyer for practical advice. There is no "one-size-fits-all" resolution, and both the legal landscape as well as the practical challenges seem to be changing daily. In the interim, we will do our best to keep you advised.

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