Common pitfalls in laying off employees

Employers can be exposed to significant liability for constructive dismissal

Common pitfalls in laying off employees

Many employers believe that they may temporarily lay off employees when business conditions require it. Temporary layoffs are specifically mentioned in the Employment Standards Act, 2000 (ESA), which sets out the parameters for lawful layoffs. Does that mean that employers can lay off their employees without exposing themselves to liability?

Surprisingly, in many cases the answer is no.

The rules for lawful layoffs are set out in sections 56 and 63 of the ESA. In general, a temporary layoff must be less than 35 weeks in any period of 52 consecutive weeks. There are certain other requirements if the layoff is longer than 13 weeks in any period of 20 consecutive weeks, including that the employer must continue to make premium payments for the employee’s benefits, the employer must recall the employee within the required period of time, or the employee must receive supplementary unemployment benefits.

A layoff that is for a period longer than the periods set out by the ESA (in most cases, 35 weeks out of 52 weeks) will constitute termination of employment by the employer.

Section 56(4) of the ESA provides:

“An employer who lays an employee off without specifying a recall date shall not be considered to terminate the employment of the employee, unless the period of the layoff exceeds that of a temporary layoff.”

While this may seem to give employers the green light to unilaterally lay off employees, as set out below there can be significant common law liability for doing so.

Layoffs under common law

The Ontario Court of Appeal has found that at common law, an employer has no right to lay off an employee. Absent an agreement to the contrary, a unilateral layoff by an employer represents a substantial change in the employee’s employment, which constitutes constructive dismissal.

This can be a source of significant confusion for employers. On the one hand, the ESA appears to allow layoffs. On the other hand, at common law there is no right to unilaterally layoff an employee, and doing so can expose the employer to significant liability for constructive dismissal.

For this reason, an employer must have the employee’s agreement for a layoff. This agreement can be a term of the employment agreement entered into prior to the start of the employee’s employment, or can be an agreement reached at the time of the layoff.

Implied contractual terms allowing for layoffs

Where there is no written employment agreement between the parties, the courts may determine what terms are implied based on what the parties would have agreed to when forming the contract.

In principle, there are situations in which an employer’s right to unilaterally impose a layoff can be an implied term, rather than a written term in the employment contract, but this will depend on the specific facts of the case.

This argument was made by the defendant employer in the case of Ristanovic v. Corma Inc. In that case, the employer’s business was drastically impacted by the COVID-19 pandemic, leading to several employees being placed on temporary layoff. The employer sought to advance the argument that in light of the pandemic’s impact on its business, there was an implied term allowing it to lay off employees in those circumstances.

The court rejected the employer’s argument for two reasons.

First, “the circumstances existing when these plaintiffs were laid off do not reasonably lead to the conclusion that the parties would have mutually agreed to allow an indefinite layoff with minimal compensation to be imposed upon employees had they but turned their mind to the prospect of their employer suffering headwinds – even material headwinds – in the operation of their business due to events abroad over which the employees have no control nor ability to provide for.”

Second, “no such implied term can override the express provisions of s. 56 of the ESA which deems a layoff longer than 35 weeks to be a termination of employment. It is not open to the parties to contract out of the minimum standards of the ESA whether by an express term of their agreement or by an implied term.”

IDEL regulation

As I have written about previously, the Infectious Disease Emergency Leave (IDEL) was a regulation under the ESA enacted by the Ontario government in the early days of the pandemic, providing additional rights to employers with respect to layoffs. However, there are conflicting court decisions about the impact that IDEL had on liability for constructive dismissal under common law.

In any case, the deeming provisions of IDEL came to an end on July 30, 2022, and therefore IDEL does not provide any basis for imposing or continuing layoffs after that date.

Conclusion

Despite what appears to be clear language in the ESA, pursuant to common law employers do not have the right to unilaterally impose layoffs. In the absence of an enforceable employment agreement that says otherwise, or the employee’s consent, imposing such a layoff can expose an employer to significant liability for constructive dismissal.

If you are in a position where the business conditions require your company to lay off employees, we recommend speaking to a lawyer to minimize any liability that may arise.

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