With a trade war between Canada and the United States looming and threatening severe economic disruption, Ontario employers must be prepared navigate serious fiscal challenges, including by reducing staffing costs while minimizing liability. In order for contingency plans to be effective, it is crucial for employers to understand the legal risks associated with such plans, most importantly, to avoid costly mistakes.
Temporary Layoffs and Hour Reductions/Pay Cuts – Advantages, Risks, and Strategies
Two methods for temporarily reducing staffing costs in the face of the economic disruption are temporary layoffs and hour reductions/pay cuts. Each has its own benefits and risks.
Ultimately, such strategies have a significant upside.
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they can be far less risky/costly than dismissing employees (particularly where the employer does not have employment contracts containing enforceable termination clauses);
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they generally involve less talent loss; and,
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it is faster and easier to recall employees from temporary layoff than to hire new staff.
However, both of these cost-cutting measures can create substantial legal risks.
Temporary Layoffs
Ontario employers can legally place employees on “temporary layoff” for up to 13 or 35 weeks in certain circumstances, without it being a termination of employment. The employer does not need to specify when they will recall employees to work at the time of the temporary layoff, nor pay them during it.
However, temporary layoffs can create substantial constructive/wrongful dismissal risks. This is because employers do not have an implied right at common law to place employees on temporary layoff. Rather, employers are only legally permitted to place employees on temporary layoff where:
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the employer has reserved the right in an employment contract;
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where the employer has an implied right because they have placed the employee on temporary layoff previously; or
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where the employee accepts the temporary layoff, by either expressly agreeing to it or acquiescing to it through their actions.
Where an employer temporarily lays off an employee without the right to do so, the employee has the option of accepting it or claiming constructive dismissal. A constructive dismissal is where an employer makes a substantial unilateral and adverse change to the fundamental terms of an employee’s employment, which legally constitutes a termination of employment and entitles the employee to receive their termination entitlements. Effectively, a constructive dismissal is a termination of employment under the law (and potentially a wrongful dismissal). This can result in substantial liability, especially if there is not an enforceable termination clause contracting out of the employee’s right to common law reasonable notice of termination. Where that is the case, the constructively dismissed employee can sue the employer for pay in lieu of reasonable notice in a wrongful dismissal action (which generally ranges from a couple of months up to 24 months of wages). However, even if there is an enforceable termination clause, the constructively dismissed employee may still be entitled to months of statutory termination pay and severance pay.
Employers should exercise great caution and seek specific legal advice before placing employees on a temporary layoff if they have not reserved the right to layoff in their employment contracts. That said, where employers have not reserved that right, they can adopt strategies to minimize the risk. For example, an employer that has contracts with clearly enforceable termination clauses can place short-service employees on temporary layoff with minimal risk, because the employees in question would not be entitled to much even if they did claim constructive dismissal. Similarly, a persuasive letter explaining the economic challenges the employer is facing which asks employees to agree to a temporary layoff to avoid terminations of employment and/or pay cuts can result in many employees agreeing, thereby eliminating any constructive dismissal risk. Practically speaking, employees are more accepting of a short-term layoff versus one that is long-term, or undefined in length.
Finally, there are also statutory limits under the Employment Standards Act, 2000 (the “ESA”) on how long employees can be placed on temporary layoff without it being deemed to be a termination of employment. These limits apply regardless of what is in an employee’s contract and vary depending on whether or not the employees’ benefits are continued during the temporary layoff. In particular, an employee cannot be laid off for more than: 13 weeks in any 20-week period if their benefits are not continued; or more than 35 weeks in a 52-week period if their benefits are continued.
Thus, employers contemplating temporary layoffs should carefully consider from the outset how long the layoffs may need to last and whether to continue employees’ benefits during the layoff. Further, such employers should ensure that they do not inadvertently exceed the maximum layoff durations permitted by the ESA, or they may be liable for employees’ statutory termination entitlements (and potentially wrongful dismissal).
Temporary Reductions to Hours and Pay Cuts
Temporarily reducing employees’ hours and/or pay is also a fairly common method of cutting staffing costs during economic crises, which have some benefits. These benefits include: (i) allowing all existing employees to continue working and earning remuneration; (ii) making loss of talent less likely than a dismissal or temporary layoff. However, this can also create substantial constructive/wrongful dismissal risks, if not undertaken properly.
In particular, substantially reducing an employee’s hours/remuneration can constitute a constructive dismissal where the employee does not agree to it. There is no hard-and-fast rule about how large the reduction needs to be to constitute constructive dismissal, but the rule of thumb is that a reduction of 20% or more is generally a constructive dismissal. Ultimately, the smaller the reduction, the less likely it is to be a constructive dismissal, and the greater the reduction, the more it is a constructive dismissal. Notably, there is less risk where an employee is paid an hourly wage (rather than a salary) and works variable hours, particularly where their contract states that they are not guaranteed any minimum number of hours. That said, any significant reduction in an employee’s pay/hours will generally carry constructive dismissal risk, and specific legal advice should be obtained in advance of such changes.
Similar to temporary layoffs, there are strategies for minimizing the legal risks related to hour reductions/pay cuts. For example: (i) reducing the hours/wages of shorter-service employees who have agreed to enforceable termination clauses reduces risks, because such employees would be entitled to far less if constructively dismissed; and (ii) persuasively requesting that employees agree to a temporary reduction in hours/pay for a specific duration while making it clear that it is to avoid temporary lay-offs/terminations of employment. Where an employee expressly agrees to a temporary reduction in their hours/pay, it eliminates the constructive dismissal risk.
The Bottom Line
Although the vast majority of the threatened US-Canada tariffs have yet to be imposed, prudent employers should prepare a contingency plan without delay. This is because employers who fail to do so may be left scrambling, making them far more likely to make costly mistakes. Furthermore, by implementing strategies like those discussed above, employers can minimize potential liability in relation to temporary cost-cutting measures.
If you have any questions or require expert assistance with preparing a contingency plan to cut staffing costs with minimal liability, please do not hesitate to contact us for expert advice and guidance.
