Addressing employment law issues in a downturn economy

Exclusive to Canadian HR Reporter from Rudner Law.

“You best protect ya neck” - Wu-Tang Clan

These are interesting times. America, our closest neighbour, erstwhile ally, and biggest trading partner has imposed significant tariffs on everything we export to it. In response, Canada has implemented its own round of tariffs on a number of American products.

The outcome, in the short term at least, is almost certainly going to be a downturn in the economy while things sort themselves out. This can lead to reduced business for individual companies. As employment lawyers, we regularly encounter employers in this situation whose initial reaction to a downturn is to suggest downsizing their workforce or reducing their labour costs by other means.

While this may be a plausible solution, it is vital that an employer goes into this with all risks assessed in order to make as informed a decision as possible.

Three options for employers

We will review three of the most common options and outline the common pitfalls that an employer may encounter in proceeding with each, and how to avoid them.

Dismissal: As most companies’ largest expenditure is its workforce, reducing headcount often seems like the most simple way to reduce costs. While this may be correct, before proceeding, a company should check with its employment lawyer to confirm the severance costs that it will incur.

Contrary to popular belief, the financial condition of the company (or industry, province, or country) is not a factor that will reduce its severance obligations. The Court of Appeal for Ontario has confirmed that an employer’s poor economic circumstances will not reduce notice entitlement. Instead, this can actually lead to an increase in notice: courts gave a “COVID bump” to some employees due to “uncertainty in the economy and the job market and fewer employers were looking to fill positions.”

This continued to be awarded as recently as 2023. Whether a “tariff bump” is pending remains to be seen, but it would not be unprecedented, given the court’s reaction to the impact of the pandemic on the economy.

By default, an employee is entitled to reasonable notice of their dismissal pursuant to common law. The length of this notice is based on many factors including the employee's age, length of service, character of employment, and availability of similar employment. The total length varies depending on the court’s assessment of these factors, but it is often longer than you might expect and can be 24 months or more, during which the employee is entitled to all aspects of their compensation.

The common law right can be displaced through contract, but many employment agreements fail to effectively do so. We have seen dozens of court decisions in which employment agreements or termination clauses within them are found to be unenforceable.

Before relying on a contract, even one that was recently drafted, check with an employment lawyer, as recent case law has rendered many contracts unenforceable. In that case, the common law prevails; many employers are caught off guard by extensive severance costs when they thought their contracts protected them.

Many employment agreements are unenforceable, based on either the language of the agreement or the circumstances in which it was implemented.

Temporary layoffs: What if, instead of dismissal, the employee is put on a temporary layoff? A temporary layoff is different from a dismissal: a dismissal is the permanent end of an employee's employment; a layoff is temporary, with the employee being called back to work at some point.

The employee's work, pay, and potentially their benefit coverage may be paused, saving the employer some money. A layoff may not be indefinite: instead, the governing employment statute will outline how long an employee may be put on layoff before it becomes a dismissal.

Placing an employee on layoff is not a freestanding right: it must be set out in an employee's employment agreement or be shown to be an implied term in light of the employer’s past practice. Alternatively, an employee may accept the layoff, but this acceptance has to be voluntary. If voluntary, the offer to be put on a layoff, the terms of the layoff, and the employee's acceptance should be clearly documented.

Without any of these, an employee who is put on layoff may claim that the employer has constructively dismissed them. A constructive dismissal is where an employer makes a change or changes to an employee's terms and conditions of employment, to the extent that the employee is no longer doing the job the employee was initially hired to perform, and refuses to return the employee's employment to the pre-existing terms.

Where an employee can establish constructive dismissal, the employer must pay the employee's entitlements on dismissal, either as set out in the employment agreement or at common law.

Reduce an employee's compensation or working hours: The third option to save costs is by reducing an employee's salary or their working hours. At first glance, this appears to be the most palatable. The employee continues earning, and the employer does not have to deal with the hassle of a dismissal.

An employer may put this option to an employee, and if the employee accepts, this may become a permanent or temporary term of the employee's employment. In either case, the terms of the change and its intended duration, if any, should be documented.

However, if an employer unilaterally imposes this change on an employee, the employer risks the employee claiming that the employer has constructively dismissed them. An employee who can establish this can seek payment of reasonable notice at common law. 

Financial support for employees

The court is unsympathetic to an employer’s financial issues when it comes to fulfilling their obligations to an employee on dismissal. A company cannot advise its landlord that it will be withholding or reducing its rent payments during a difficult period; the same holds true for its relationship with its employees. The court’s role is to protect an employee in a vulnerable situation: an employee is rarely more vulnerable than at the time of their dismissal, particularly during a period of economic strife.

As such, a court will order that an employer ensure that an employee is financially supported in the period following their dismissal.

There are ways that an employer can protect itself in advance or alleviate the impact of an economic downturn. Having a properly drafted and implemented employment agreement with each employee is crucial. This can ensure that the employer is aware of the cost that will be incurred for dismissing each employee, permitting the employer to plan for the process and save costs. An enforceable employment agreement can also ensure that the employer can put an employee on a temporary layoff without a risk of a constructive dismissal.

Beyond this, the employer can seek the employee’s agreement to cost-saving measures such as reducing an employee's hours of work or compensation, or a temporary layoff.

Like tree planting, the best time to get an employment agreement in place was a while ago. The second best time is now. While we head into what may be a period of economic uncertainty, it is an ideal time to review your paperwork and ensure that everything is enforceable, and will work when you go to rely on it. Put differently: now is the best time to “protect ya neck”.

Geoffrey Lowe is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].