What to do when client cutbacks force the contractors to cut staff
Question: Our (non-union) company performs work under contract for several large corporate clients. We expect one of our clients will soon cut back on the services we provide, which would force us to lay off staff, and the length of layoff would be uncertain. At what point would we be required to pay severance?
Answer: In difficult economic times, employers may find themselves in the position where they need to lay off workers temporarily, with the intention of recalling them once business picks up. Unionized employees can usually be laid off temporarily, under the terms of the collective agreement. But where non-union workers are involved, there may be legal restrictions on an employer’s ability to implement temporary layoffs.
The employment relationship is governed by the express or implied terms of the parties’ employment contract, and in most cases it will also be regulated by employment standards legislation. Where an employer dismisses an employee without cause, it will be required to provide the amount of notice or severance compensation that is required by the employment contract and by the applicable employment standards statute. If the parties do not have a written employment contract that contains an enforceable termination provision, the employee will be entitled at common law to receive reasonable notice of dismissal, or compensation in lieu of such notice.
In many Canadian jurisdictions, employment standards legislation allows an employer to lay off an employee temporarily for a defined period of time, without that layoff being considered a termination of employment. In British Columbia, for example, the Employment Standards Act, defines “temporary layoff” as a layoff of up to 13 weeks in any period of 20 consecutive weeks, and provides that a temporary layoff does not constitute a termination under the act.
The Ontario Employment Standards Act 2000, also defines temporary layoffs as no more than 13 weeks in a period of 20 consecutive weeks, as well as up to 35 weeks in any period of 52 consecutive weeks, where one of the following conditions is met:
•the employer pays substantial payments to the employee
•the employer makes payments for the employee’s benefit under a retirement, pension or insurance plan
•the employee receives supplementary unemployment benefits
•the employer recalls the employee within a time set by the director of employment standards
•the employee works elsewhere during the layoff but would otherwise be entitled to receive supplementary unemployment benefits
•the employer recalls the employee within a period of time set out in an agreement between them.
However, it is important to recognize these statutory provisions apply only for the purpose of determining the employee’s entitlement to notice or severance under the employment standards statute. They do not operate to allow an employer to lay off an employee temporarily, where a right of layoff does not exist under the express or implied terms of the parties’ employment contract.
At common law, an employer does not have an implied right to lay off an employee temporarily. If the right does not exist through contract or practice, an employee who is temporarily laid off can treat the layoff as a constructive dismissal.
In the above situation, the employer may be exposed to significant severance liabilities if it has to lay off workers with little or no notice because of service cutbacks by the client. Some or all employees may elect to make constructive dismissal claims and, depending on the number of workers affected, the employer may have to pay both individual and group termination pay under employment standards legislation.
There are three ways to insulate a company against these unexpected liabilities. First, it is advisable to have employment contracts that contain enforceable termination provisions limiting the employee’s right to notice or severance compensation in the event of a termination of employment without cause. Second, if temporary layoffs occur from time to time in the business, the employment contracts should be drafted to give the express right to implement such layoffs. And third, the contracts with clients should require the client to provide enough notice of any termination or service cutback, to enable the employer to provide notice to employees and avoid having to pay them severance compensation.
