Canada: Temporary Layoffs: A Cautionary Tale For Employers

Last Updated: July 3 2012
Article by Nav Bhandal

When times are tough, layoffs provide an efficient way to temporarily reduce labour costs while riding through the economic downturn. In the absence of providing temporary layoffs, employers would have to dismiss employees, incur the cost of paying severance packages, and then have to spend additional time and money hiring new employees once the downturn is over.

However, two recent cases provide a timely wakeup call to employers that if layoffs are not administered in the right fashion, companies could be forced to pay expensive severance packages, which the layoffs were designed to avoid in the first place.

McLean v. The Raywal Limited Partnership, 2011 ONSC 7330 examined the issue of including a clause related to temporary layoffs in the employment contract. Ms. McLean joined the company in 1998. At that time, Raywal's handbook had a provision stipulating that the company could temporarily lay off its employees. However, Ms. McLean was not advised of this fact in her written offer of employment and she was not given a copy of the handbook at that time. In effect, Raywal neglected to make the handbook a term and condition of her employment. In 2008, Ms. McLean accepted a new position with Raywal and she was required to accept a new offer of employment. The new offer indicated that she had read and would follow the policies of the handbook, including the provision governing temporary layoffs. In October 2001, Ms. McLean was placed on a layoff. On May 27, 2011, Raywal sent her a notice of recall, but Ms. McLean took the position that Raywal constructively dismissed her by placing her on layoff in the first place. Raywall argued that the layoff was valid.

The Court held that Ms. McLean was dismissed when she was placed on layoff. Ms. McLean's 1998 employment contract did not contemplate that she could be laid off as there was no express reference to layoffs, and there was no reference to indicate that the terms of the handbook (including the layoff provision) applied to her employment. Although the 2008 contract referenced the handbook, the Court held that she was not provided with any fresh consideration in exchange for signing the 2008 contract. In effect, she ought to have been provided with some "benefit" (i.e., compensation or promotion) for signing the 2008 contract, in order to make that contract enforceable. Ms. McLean was awarded 10 months' damages for wrongful dismissal.

The case of Elsegood v. Cambridge Spring Service (2001) Ltd., 2011 ONCA 831 examined whether a termination for the purposes of the Employment Standards Act, 2000 ("ESA") entitles an employee to damages under the common law. Mr. Elsegood was employed with Cambridge for more than seven years. The relationship was not governed by a written contract. Mr. Elsegood was laid off for economic reasons on April 4, 2009. He was recalled on June 9, 2009, but was laid off for a second time on July 28, 2009. Throughout both of the layoffs, Cambridge continued to pay its portion of Mr. Elsegood's benefits. Pursuant to Section 56(1)(c) of the ESA, an employee's employment is terminated if the layoff lasts for 35 weeks in a period of 52 consecutive weeks. By January 2010, the layoff had reached 35 weeks within a 52-week period. Rather than filing a complaint with the Ministry of Labour for his statutory termination entitlements, Mr. Elsegood elected to bring a Small Claims Court action for common law damages for wrongful dismissal. Cambridge paid Mr. Elsegood his entitlements under the ESA, but argued that he was not entitled to common law damages since his dismissal was only a "termination" for the purposes of the ESA. The Small Claims Court judge disagreed with Cambridge awarded Mr. Elsegood six months' damages for wrongful dismissal. The case was ultimately appealed to the Ontario Court of Appeal.

Cambridge argued that the ESA and common law are independent regimes, in that the employee's "actual" employment status is defined by the common law, and the ESA operates only to entitle the employee to the minimum remedies under the ESA. Cambridge further argued that common law damages for wrongful dismissal are only available for what would constitute a dismissal at common law and would not be available for a termination under Section 56(1)(c) of the ESA. The Court of Appeal rejected Cambridge's argument. The Court concluded that the common law and ESA do not exist independently of one another – a termination pursuant to a statute (e.g. ESA) also constitutes a termination at common law, thereby entitling the employee to make a claim for wrongful dismissal. The Court reasoned that the alternative would mean that employers could avoid providing termination entitlements by simply laying employees off indefinitely.

The Court also affirmed the long-standing principle that an employer has no universal right to lay-off an employee. Unless the employment agreement, either expressly or implicitly provides that the employer can temporarily lay off an employee, a unilateral layoff triggers a constructive dismissal. Furthermore, even if the agreement provides for layoffs, such layoffs cannot be so long as to trigger a termination under the ESA.

Employers Beware

These cases illustrate the common pitfalls that employers can fall into with respect to layoffs.

First and foremost, there must be a clear agreement providing that employers can lay off employees. In the absence of such an agreement, a layoff, regardless of the duration, will trigger a constructive dismissal. Preferably, this agreement should be in writing and made with the employee at the outset of the employment relationship. If the provision is set out in an employee handbook, then employers must provide employees with a copy of the handbook, ask them to acknowledge that they have received and read it, and reference the handbook in the employment agreement. If such an agreement is not made at the outset, employers can incorporate a layoff provision into the agreement at a later date provided the employee is given something in exchange for signing the new agreement. The safest "exchange" is a signing bonus.

Second, even if an employment agreement is in place permitting layoffs, employees must be recalled within the time stipulated in the ESA (or other applicable employment standards legislation), so as not to trigger a termination under the statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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