Canada: Employment Law @ Gowlings - March 30, 2009

We have been receiving many calls as of late from employers who must cut costs in order to keep the doors open. Regrettably, cost cutting measures typically involve reducing employee remuneration, either through pay reductions, reduced work weeks, lay-offs, or terminations. This bulletin is meant to provide some guidance in dealing with the staffing issues faced by employers everyday, but certainly magnified in these tough economic times.


Many employers who are experiencing financial difficulty, and need to reduce staffing costs, do not want to take the drastic, costly, and often irreversible step of terminating employment. Instead, they come to us asking how they can go about putting some of their employees on a temporary lay-off until things turn around. It has become apparent that many employers are under the understandable misconception that they have the right to put any and all employees on lay-off at will. This is, for the most part, untrue.

A lay-off constitutes a fundamental change in the terms of the employment contract. Absent a contractual right to do so, laying off employees without their consent constitutes constructive dismissal for which the employees can sue.

There is, however, some flexibility in the law. If the employer has a known practice of laying off employees, it may be found that it is an implied term of the employment contract. Similarly, the right to lay-off may be an implied term of the employment contract in certain positions and industries, such as labourers in the construction or manufacturing industries.

Reduced Work Week

Some employers are considering the option of a reduced work week to avoid laying off or terminating employees. Reducing an employee's work week, and necessarily, his or her compensation, once again constitutes a change in the employment contract. However, the number of days per week and the period over which this occurs impact on whether the change is so significant that it constitutes constructive dismissal.

For example, if an employer wishes to reduce an employee's work week from 5 days to 4 for an indefinite period of time, this may constitute constructive dismissal because it necessarily results in a 20% reduction in pay. Reducing an employee's work week to 4 days one week, and 5 the next, may be permissible without constituting constructive dismissal as it would result in a 10% reduction in hours and compensation during the period. Similarly, if an employer institutes a reduced work week for a specific period of time, say 2 or 3 months, the reduction in compensation spread out over the year, would be less than 10%.

When it comes to changing the terms of an employment contract absent consent of the employee, employers must be mindful of case law which provides that if an employer wishes to unilaterally alter the terms of an employment contract in the face of objection from the employee, it must give sufficient notice to the employee that his or her employment is being terminated, coupled with an offer of reemployment on the new terms. Simply giving reasonable notice of the proposed changed term is not sufficient.

If an employee is willing to agree to a reduced work week, there would be no constructive dismissal because it would not be a unilateral change to the employment contract. Employers would be wise to get the employee's agreement in writing and provide adequate consideration to ensure enforceability of the changed term.

Employees also have an obligation to mitigate their loss in pay. Last year, the Supreme Court of Canada ruled that employees have an obligation to remain in employment, essentially under protest, while looking for other work. Accordingly, even if an employee refuses to agree to the reduced work week and elects to sue for constructive dismissal, he or she is likely to be required to remain in employment at the reduced schedule until reasonable alternative employment can be found, resulting in a reduction in liability to the employer.

Another solution for some employers who wish to implement the reduced work week is the Work-Sharing Program through the Government of Canada. For employers who qualify, employees who have their work week reduced by 1 to 3 days of work per week will receive Employment Insurance benefits for the days not worked, and there is no usual waiting period. Both the employer and employee must agree to the arrangement in writing, and it must last for more than 6 weeks up to 26 weeks, with extensions granted in some cases to a maximum of 38 weeks. The Federal Government announced in 2009 that it will be increasing the maximum number of weeks to 54; however, that increase has not yet received Royal Assent.

There is no risk to employees in accepting this program as regular Employment Insurance benefits are unaffected in the event that the employees still become laid off or lose their jobs. To qualify, an employer must have been in business for at least two years, show that the need to reduce its employees' hours is "temporary, unavoidable and not seasonal in nature," and that the employer has a recovery plan with a reasonable expectation of success within 26 weeks. The tricky part of the application for many employers is the recovery plan which requires the implementation of a number of recovery strategies that are not reliant on an upturn in the economy.

Set out below this article, please see the summary of the Work Share Program requirements and important information.

Reasonable Notice in Poor Economic Climates

In some cases, termination of employment is regrettably unavoidable. Absent a contract of employment, employees are entitled to notice of termination in accordance with both the applicable employment standards legislation and the common law.

One of the factors that courts will consider in determining common law reasonable notice is the likelihood of the employee finding re-employment, and how long that might take. In a poor economic climate, it will likely take most employees a longer period of time to find alternative employment, and therefore, many would argue, the notice period should be extended. This issue, being the impact of an economic downturn on reasonable notice, has been dealt with by the courts. A review of the case law makes clear only that the courts will consider the economic climate as one of many factors, but will not give it any greater weight.

Conversely, employers have argued in some cases that the period of reasonable notice ought to be reduced during an economic down turn because having to give usual amounts of notice or pay in lieu thereof may result in substantial financial hardship, and even ruin. The courts are relatively unsympathetic to the plight of the employer in this regard, particularly those who have parent or subsidiary companies with assets, and typically hold employers fully accountable for the "usual" period of reasonable notice, whatever that may be depending on the facts of the case.

Voluntary Retirement or Voluntary Severance Packages

Employers may also consider offering employees voluntary retirement packages. It goes without saying that this option must be treated very carefully in order to avoid human rights complaints. Older employees or other employees who may be protected by the applicable human rights legislation, such as visible minorities or disabled workers, should not be made to feel that they are being targeted. Releases are a must if an employer is going to follow this course of action.

Contracts of Employment

Now would be an ideal time to consider implementing written employment contracts if you do not already have them in place for ALL employees. Comprehensive employment contracts will assist with reducing your financial liability to employees. Even if you presently have existing employees not subject to written contracts of employment, there are ways to introduce them, and we would be happy to assist you through that process.

Although there will be casualties during this economic down turn, there are options. Employers are encouraged to seek advice in order to avoid losses where possible while remaining fully apprised of their respective rights and obligations.


Employer Qualifications for Program

  • Employer must have been in business for 2+ years
  • Show that the need to reduce hours is unavoidable, unexpected and temporary
  • Work share unit must be 2+ employees
  • Employers who are presently involved in a labour dispute may not apply
  • Outside sales staff, managers, and those who assign work load are generally not allowed to participate in the program
  • Must reduce the work week by at least one day per week, but no more than 3 days per week
  • Work share program period must be at least 6 weeks and must end at 26 weeks, unless the employer applies and receives approval for an additional 12 (currently waiting for a further extension to receive Royal Assent)
  • Employees must have between 420-910 hours of insurable employment
  • Employers must fill out and file an application and recovery plan
  • Employees must agree, and sign agreement prepared by the Commission

Information for Employees

  • Employees must work extra days when requested to do so, and amounts will be deducted from EI benefits
  • There is no 2 week waiting period, though the first cheque is likely not to be received for 28 days
  • If the employee is laid off or terminated during the work share period or after, regular EI benefits are unaffected

Employer Requirements During Work Share Period

  • Provide employees with ROE
  • Assist employees with the preparation of bi-weekly report cards (regarding hours worked, income received, etc.)
  • Prepare utilization reports for every 2 week period which include: hours worked by employees and how employees spent their time (codes are provided)
  • Advise Commission of lay-offs or terminations
  • Lay-offs must be pre-approved by the Co-ordinator, and the workers remaining on the work share program must also agree and agree to remain in the program
  • Make work share information available to employee
  • Maintain all benefits (including perks) through work share period, though some may be reduced due to change in gross pay, and employers must advise employees that these benefits may be reduced
  • May not hire during work share period unless the employer needs to replace existing employees, and the hire must be on approval of Commission
  • Pay statutory holidays (EI will not cover this)
  • Report progress on recovery plan
  • Report overtime hours worked by employees
  • Advise Service Canada of any changes to work schedules or the agreement

Content of Recovery Plan

  • Description of the business
  • Description of the employees i.e. union or non-union
  • Description of the plan for recovery, including:
    • Expected duration, and cause of work shortage
    • Outline of steps to be taken to generate business (objectives, activities, timeframes, milestones, expected outcomes, cost cutting measures, new types of business sought, new technology being utilized, new markets, scheduled shows/fairs, customer incentives, readjustments of current products)
    • Description of employer initiated skills enhancement/upgrading for employees
    • Future sales/business projections
    • Measures taken to overcome downturn in business before applying for work share program
    • Work force adjustments made before or after work share program
    • Identified alternatives to the work share program
    • Risks that may hinder recovery, and any alternative plans

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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