Business leaders, large and small, must be prudent and deliberate in navigating the complex legal landscape they face as a result of the threatened tariffs on Canadian goods exported to the U.S. Critical among their planning must be adjustments to their workforces. Employment law considerations must be at the forefront of those plans to ensure employers do not unintentionally compound the problems created by the tariffs.

Does an employer have a legal right to make changes?

The employment relationship is a contract. As with any contract, neither party has the right to unilaterally change the terms of the contract, even when the reasons for the proposed change are compelling. As many learned the hard way during the COVID-19 pandemic, employers do not have an automatic right to make quick and dramatic changes that “make sense” in the face of a crisis such as tariffs. Even where the changes are made equally or equitably across the entire workforce, those changes can have unintended and dramatic effects on the employer’s legal obligations to its employees.

Some non-unionized employers have negotiated the right to reduce compensation, adjust work hours/wages and impose temporary layoffs in the face of business changes. However, most have not expressly negotiated those rights. Consequently, such actions can constitute a breach of the contract of employment, and entitle the employee to claim they have been constructively dismissed, resign and sue for wrongful dismissal.

Proactive reduction in hours/compensation

It is essential to determine if the employer has the right to unilaterally reduce hours of work and compensation. It does not matter that the same level of reduction is imposed on all employees in the business, or that those higher up in the business suffer a greater reduction. An “across the board” adjustment can be an across the board constructive dismissal of all or a large segment of the workforce.

Temporary layoff

Similar to a unilateral reduction in compensation, it is crucial for an employer to analyze whether it has the express right to implement a temporary layoff. Decisions in several provinces have determined that statutory provisions related to temporary layoffs do not create the right to layoff. If there is no express right in the contract of employment (written or unwritten), there is the risk of a constructive dismissal claim. See our article on temporary layoffs here.

How to assess the risk of constructive dismissal when adjusting to the effect of tariffs

The questions an employer considering unilateral adjustments must ask itself include the following:

  1. Does the contract of employment include an express provision in a written employment agreement permitting the employer to adjust compensation or implement a temporary layoff?

    Whether the agreement/layoff provision is enforceable will be subject to an analysis of whether there was consideration (value) to support the written agreement, compliance with employment/labour standards legislation, ambiguity in the language of the relevant provision, etc.

  2. Does the employer have a policy permitting the employer to implement such changes?


    Whether the policy creates the right will be subject to an analysis related to the enforceability of the policy. Is the policy inconsistent with an express term of employment? Is the policy reasonable, clear and unequivocal? Was the policy communicated to the employee so they understood it was a condition of employment?

  3. Can the employer prove it is an implied term of the contract of employment that the employer can implement a compensation adjustment or temporary layoff?


    4. The employer can rely on evidence that the employee knew they were subject to changes such as past layoffs of the employee or other employees in the workplace, or a general practice of layoffs in the employer’s industry.

Are all compensation adjustments a constructive dismissal?

If there is no express or implied right in the employer to unilaterally make a compensation adjustment, such an adjustment would be a breach of the contract of employment. However, not all breaches constitute constructive dismissal. The significance of the breach determines whether the employee can resign and sue for wrongful dismissal, or merely has a claim for damages equal to the difference between what should have been paid and what was paid.

Conventional wisdom suggests a change in compensation of 10% or more is a constructive dismissal. However, there is no binding authority which says a change of less avoids the risk of a claim, and that threshold is uncertain. It is likely that a 25% pay cut over any period would be considered a constructive dismissal, even though that level of cut over three months constitutes only an annualized cut of 7.5%. Employers implementing a compensation reduction would be wise to avoid any cut greater than 10% as compared to the prior pay period for any duration.

How great is the risk of a claim?

The likelihood of an existing employee suing their employer is low. Most employees will accept the compensation adjustment or layoff without express complaint. They may begin a search for replacement employment, but are not likely to commence a formal claim.

Those employees who are otherwise dissatisfied with their employment, or seeking to leave for whatever reason, may take the opportunity created by the breach of contract to take the position of constructive dismissal. This opportunism can be devastating to the unsuspecting employer.

It is often the longest serving and oldest employees who are prepared to resign and sue. Because these employees are entitled to the greatest amount of common law notice of termination/pay in lieu of notice (up to 24 months), and older workers are recognized to have more difficulty finding comparable replacement employment which would otherwise mitigate their damages, they are the most expensive to terminate without just cause. The employer who is merely seeking to reduce their labour costs by 10%, can find themselves immediately owing 24 months pay to multiple employees. This unforeseen liability can be devastating to an employer already facing challenging financial circumstances.

Work share program under employment insurance

Employers suffering a temporary decrease in business activity beyond their control may be eligible to participate in the federal Work Share Program. To be eligible, employees must suffer at least a 10% reduction in normal weekly wages. Participants can work reduced hours for regular wages and receive EI benefits for the balance of the week, for a maximum of 26 weeks. An extension for an additional 12 weeks is possible.

Terminations

Some employers will make the decision to terminate the employment of one or more employees in response to the business effects of the tariffs. Those employers must adhere to minimum statutory notice/pay in lieu of notice requirements, and severance pay requirements if applicable. The extent of the liability may be determined by written employment agreement termination provisions, or common law notice of termination obligations (up to 24 months in some cases).

Mass termination

Depending on the employer’s industry, number of employees impacted in a single province, and the time period over which the terminations are implemented, an employer may be required to comply with statutory “mass termination” provisions. These typically require the employer to notify the applicable ministry of labour of the terminations, and provide greater notice of termination to each employee. For example, the mass termination provisions apply when an Ontario employer terminates 50 or more employees in a four-week period. Adherence to the process is critical as notice of termination provided to employees prior to notice to the Ontario MOL is ineffective.

Fixed-term contracts

In the absence of binding early termination provisions, a court may find an employee employed on a fixed-term contract to be entitled to damages equal to the wages which would have been payable for the balance of the contract. There are recent decisions awarding several years’ pay to employees, without any reduction for amounts they did or might earn during the balance of the contract period. Employers must ensure they properly analyze the cost of terminating a fixed-term contract.

Temporary foreign workers

Employers terminating the employment of employees on temporary work permits may face greater liability. A permit is often linked directly to the employer, which restricts employment to that employer. Consequently, the employee cannot easily find replacement employment. A court is likely to award greater notice/pay in lieu of notice to such employees.

Government relief

There is some talk of the government providing support to industries affected by the tariffs, similar to the support provided during the COVID-19 pandemic. However, there is no clarity on this as yet.

Independent contractors

Independent contractors are often the first workers to be affected by a reduction in force or downsizing. Many businesses believe that these workers are not entitled to common law notice of termination or pay in lieu of notice, or they seek to rely on termination provisions which are unenforceable.

An agreement between the worker and the receiver of the services that the worker is an independent contractor is not determinative of their status. A court or tribunal will examine the substance of the relationship to determine status.

Workers who are found to be employees will be entitled to notice/pay in lieu of notice. Workers who are contractors, but are found to be dependent on the receiver of the services, are also entitled to notice/pay in lieu of notice, often equal to the amount an employee would be awarded.

Takeaways

Employers must be informed and prudent. They cannot assume that what makes sense from a business perspective in response to the tariffs is without legal consequence. Employee rights and employer liabilities are often analyzed from the perspective of the employee and can have significant, unanticipated effects. Actions that were intended to save the employer money in the face of a crisis can result in significant and unplanned liability to employees.

Actions without analysis can compound the financial impact of the tariffs, and can be the difference in navigating the difficult road ahead.

Gowling WLG is prepared to provide you with insights on how to respond effectively to these changes. 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.