Canada: Layoff As Constructive Dismissal: A Cautionary Tale For Employers

Last Updated: December 19 2012
Article by Ralph N. Nero and Keri L. Bennett

When is a layoff not a layoff?  When it is a constructive dismissal, according to an Ontario judge. McLean v. The Rawyal Limited Partnership (PDF) reaffirms the principle that unless incorporated as an express or implied term of the employment contract, a layoff may be treated as constructive dismissal – meaning the employee can sue for pay in lieu of reasonable notice. 

Facts

The employee in this case was hired as a kitchen designer by Rawyal, a builder of custom kitchens. At her initial date of hire, the company had an employee handbook in place that included provision for possible layoffs.  However, the employee's contract of employment did not incorporate or refer to the employee handbook. The employee did not receive a copy of the handbook. She was not required to acknowledge receipt or agreement, or acknowledge that it constituted part of her contract of employment.

In 2008, ten years into the employment relationship, the employee was offered and accepted a new position. On commencement of this new position, the employee was required to accept a new written offer of employment in which she agreed that she had read and would follow the employee handbook. This handbook also contained layoff provisions.

The employee was laid off in October of 2010 and provided a recall date of June 27, 2011. The employee was in fact recalled on May 27, 2011. However, the employee did not return to work, but instead commenced a wrongful dismissal action against the company.

Decision

Justice Whitaker ruled that the employee had not validly consented to the layoff provisions in her original contract of employment, as it was not a valid term of her employment. Therefore, the question became whether the layoff provisions in the employee handbook referred to in the 2008 contract of employment were enforceable.

The judge found that the employee had received no consideration, or greater benefit, in exchange for signing the new contract of employment. There was no "obvious or certain improvement in compensation or other terms of employment" provided to the employee as part of the new position. The employee described the new position as a "lateral move". As the mere continuation of employment generally does not constitute adequate consideration, the layoff provisions in the employment handbook were determined to be unenforceable.

Despite the fact that the employee was subsequently recalled and elected not to return to work, the judge awarded the employee 10 months' pay in lieu of notice on the grounds that she had been constructively dismissed.

Take-Away For Employers

Employers in all provinces are advised to ensure that adequate and fresh consideration is provided to existing employees where the employer wishes to alter terms of employment or introduce significant new policies. This is obviously most important in the case of negative changes.

The enforceability of employee handbook provisions or policies is often at issue. In order to be binding, employees must be made aware of the policies or handbook and ideally they should be provided to employees prior to acceptance of employment. Employers are also advised to consider including reference to or attaching all key policies in the contract or offer of employment. A signed employee consent or acknowledgement can also be helpful.

This decision is consistent with the prior caselaw on layoff and constructive dismissal in provinces other than Quebec. Whereas a temporary layoff of any level of employee may constitute constructive dismissal in all provinces but Quebec, only temporary layoffs of managerial employees are likely constitute constructive dismissal in Quebec. As such, should employers in Quebec require the flexibility to temporarily layoff managerial employees and employers throughout the rest of Canada require the flexibility to temporarily layoff any staff, they are advised to include express provisions for layoff in the employment contract or offer of employment.

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