Tariffs imposed by the US government against Canadian exporters are likely to have a significant effect on the Canadian workforce. Businesses affected by the tariffs will need to react to the change in circumstances to ensure their continued viability and success. One possible step many employers are likely to consider is reducing their labour costs by implementing layoffs.

This article discusses a non-unionized employer’s right to implement layoffs, and the consequences of doing so.

What is a layoff?

The term layoff in respect of an individual’s employment is often used interchangeably with the term termination. Particularly in the popular media, mass terminations by an employer will often be referred to as layoffs. Unfortunately, the distinction between these terms has been blurred. Employers must recognize the distinction and the consequences of both.

  • A termination refers to the complete severing of the employment relationship. The relationship is over, and the employer has obligations to provide notice of termination/ pay in lieu of notice/ severance pay as determined by statute, contract and common law.
  • A layoff refers to the temporary interruption of the obligations of each party to the other (i.e. the employee’s obligation to provide services to the employer; the employer’s obligation to provide work and wages/salary to the employee).
  • A termination is permanent. A layoff is temporary and based upon the assumption that the obligations will resume sometime in the near future.

Most employers are well aware of the potential liability in the event of the termination of the employment of an employee. However, layoffs can be equally dangerous to the unwitting employer.

Does the employer have the right to layoff?

Many employers assume that they have the right to temporarily layoff employees without suffering any consequences. However, for example, several Ontario decisions have made it clear that the right is not automatic. In the absence of an express or implied term in the contract of employment, whether written or oral, a temporary layoff, no matter the duration, constitutes a constructive dismissal from employment.

The view of the courts is that the unilateral and substantial change to a fundamental term of the employment relationship (i.e. the employer’s failure to provide work and pay wages/salary) constitutes constructive dismissal from employment, and entitles the employee to the same notice of termination/ pay in lieu of notice/severance pay that the employer would owe if they terminated the employment.

What we can learn from the layoff provisions in Ontario’s ESA

Ontario’s Employment Standards Act, 2000 (“ESA”) contemplates a temporary layoff of up to thirty-five weeks in any fifty-two week period. Employers will ask why they cannot rely on those provisions to implement a temporary layoff.

The courts have determined that the ESA provisions do no create the right to layoff. They simply govern how the right to layoff can be implemented. It is the contract of employment, whether express or implied, written or unwritten, that creates the right to layoff; not the ESA.

In the absence of an express or implied term in the contract of employment between the employer and employee, a temporary layoff can be considered an immediate termination of employment by the employee.

How can the employer prove it has the right to layoff?

The most effective way for an employer to prove it has the right to layoff is through written terms of employment. Examples include an express term in the written employment agreement, or a policy communicated to employees.

Express terms can be verbal, but the employer will be required to prove that the employee knew of the term and agreed. This is uncertain.

An employer may be able to convince a court or tribunal that the right to layoff was an implied term in the contract of employment. Evidence of an implied term can include the prior layoff of the employee, the past practice of the employer in laying off other employees of which the employee was aware, and common practice in the employer’s industry. While they can be proven and relied upon, implied terms are inherently dangerous. Their existence and details must be proven, and it is very difficult to do so.

Consequences of a layoff when the employer had no right to do so

If the court or tribunal determines that the contract of employment did not include a term allowing the employer to temporarily layoff the employee, the layoff constitutes a constructive dismissal. The employee has the right to take the position that they have been terminated without cause and proper notice. They can resign, but claim the same remedies to which they would be entitled if they had been terminated.

In Ontario, these remedies include termination and severance pay under the ESA, pay in lieu of notice under a written contract of employment, and pay in lieu of notice at common law. The latter can be as much as 24 months of total compensation (less what the employee earns in mitigation of their damages).

Takeaways

Employers should carefully consider whether they have sufficient evidence of the right to layoff before they proceed to implement a temporary layoff. As a result of the risk of the same potential liability for a temporary layoff as a termination without cause, employers are wise to consult legal advice before implementing a temporary layoff.

The effect of US tariffs is likely to cause immense economic strain on employers affected by the tariffs. Those employers must be careful not to amplify the financial burden of the tariffs through costly missteps in their reaction to them. Temporary layoffs may not be a prudent reaction.

If you have any questions about the impending tariffs, please contact a member of the Employment, Labour & Equalities group, or read more insights on our trade turbulence hub.