How to avoid constructive dismissal claims with temporary layoffs

Temporary layoffs are often seen by employers as a practical response to fluctuating business needs — especially during economic downturns or seasonal slowdowns.

However, many Canadian employers are unclear about when and how these layoffs can be legally implemented. The confusion stems largely from the misperception that employment standards legislation itself grants the authority to temporarily lay off staff.

“Even though the legislation sets out that you can perform temporary layoffs, it needs to be provided for in the employment agreement, or else it's not allowed,” says Julia Dales, a senior associate at Dentons in Ottawa.

It’s a nuanced area of employment law, but it’s also a helpful tool for employers, she says: “It just has to be done properly.”

The challenge is that law is not always clear and can be “misleading” for employers, says Shafik Bhalloo, senior counsel at Kornfeld in Vancouver.

In the absence of clear contractual language, courts will often side with the employee, treating the layoff as a termination and entitling the worker to significant compensation.

“Neither statute in British Columbia nor Ontario... independently grant employers the right to impose layoffs,” he says. “They do assume the existence of such a right under employment contracts.”

Court decision highlights contract language 

A recent ruling from the Ontario Superior Court in Taylor v. Salytics Inc. underscores this point, confirming that a properly drafted layoff clause can shield employers from claims of constructive dismissal. The case involved Barry Taylor, a senior technical consultant who had worked at Salytics for over a decade before being temporarily laid off in April 2024 due to financial strain.

Taylor had earlier agreed to a 20% reduction in pay and hours to help the company weather declining revenue. Just three weeks later, he was placed on an unpaid, temporary layoff.

Arguing that this amounted to a constructive dismissal, Taylor sought six months' pay in lieu of notice. He claimed that the layoff clause in his contract was void because it was grouped with other termination provisions that did not comply with the Employment Standards Act (ESA).

Justice Charney rejected this argument and dismissed the application.

“The placement of the layoff provision under the Termination heading cannot be determinative of whether it is a termination clause. Otherwise, an employer could change the outcome simply by rearranging the headings in the contract. That would be inconsistent with the principle decided in Waksdale that the characterization of the provision does not depend on its placement, and the court must focus on the substance rather than the form.

The fact that a unilateral layoff by an employer constitutes constructive dismissal at common law does not make a lay-off provision in an employment contract a termination provision, he said in his decision.

“A layoff is a termination when there is no clause in the agreement permitting the employer to lay off the employee. When there is such a clause, the layoff is not a constructive dismissal, and therefore not a termination.”

Number one rule of temporary layoffs

While Taylor lost the case, it’s still an “instructive” decision in showing how temporary layoffs work, says Dales.

Most importantly, the employer included temporary layoffs in the employment agreement.

“The reason it's not allowed for — unless it's in the contract — is because if you change a substantial term of someone's employment, like take their work away and perform a temporary layoff, then they can claim that it's a constructive dismissal. So, essentially, you've changed my employment so substantially that you've terminated it,” she says.

Employers should note that a temporary layoff could also mean less work, so someone earning less than 50% of their regular earnings, says Dales, citing Ontario legislation.

“Employees might be working just far less time, and it can still qualify as a temporary layoff, and they'll still be able to access employment insurance benefits,” she says, so employers should remember to file Records of Employment for these workers.

At common law, a one-sided, unilateral layoff by the employer, without express or implied contractual authority, almost always constitutes constructive dismissal, because it represents a fundamental breach of employment contract, says Bhalloo.

“Courts in both Ontario and British Columbia and other parts of Canada have repeatedly confirmed this principle.”

As a result, he advises employers to “include clear layoff clauses in employment contracts [that] expressly state the employer's right to impose temporary layoffs.”

A lack of clarity in contracts creates risk.

“Employers cannot lay off employees with impunity,” says Bhalloo. “During COVID, a lot of those employers were caught off guard because their employment contracts did not contain layoff clauses.”

Temporary layoffs: timing is everything

To avoid unintended terminations, employers must also understand the specific timelines allowed under employment standards legislation. In Ontario, a layoff longer than 13 weeks in any 20-week period — without continuing benefits — can be deemed a termination.

But if benefits or other payments continue, the rules change, says Dales.

If they want to perform a layoff longer than 13 weeks within a period of 20 consecutive weeks, she says, "they have to continue either benefit contributions or making certain payments — or else they can't exceed that time limit.”

Employers must diligently track the duration of temporary layoffs to ensure compliance with statutory limits, she says, highlighting the importance of understanding the consecutive nature of the layoff period.

"When the legislation says... that a layoff becomes a termination if it's over 13 weeks in a period of 20 consecutive weeks, it's actually a rolling period,” says Dales. “So, it's not just like you take a start date and end date and that's 20 weeks — it's not from whenever the last layoff was.”

If a temporary layoff exceeds the maximum duration allowed under the applicable employment standards legislation, it may be deemed a termination, she says, “and then the employee will be entitled to their entitlements determination as of the first day of the layoff."

Obtaining employee consent

The Taylor decision reinforces that properly drafted contracts are the first line of defence for employers managing layoffs. Employers without layoff clauses must obtain employee consent before proceeding — with stipulations.

“You have to give some value, some consideration,” said Bhalloo. “If you're changing existing employment contracts with employees, you cannot do it unilaterally.”

Employers should review their agreements annually and update them as necessary to ensure they contain valid layoff provisions before any layoff is contemplated, he says.

“If they do not, consider renegotiating terms with employees with proper consideration, so give some value to make the changes or modify employment contracts,” he says.

There would still need to be some sort of consideration that goes to the employee, says Dales, because “they're essentially agreeing to change a substantial term of their agreement.”

Is implied consent a wise approach? If temporary layoffs have been a past practice, the employer may decide there’s implied consent from employees the next time around.

However, this is fact-dependent, says Bhalloo, and it's not a safe substitute for express contractual language.

“This is something that I'm very cautious [about] when I'm looking at it or advising clients.”

Dales says she also wouldn't recommend that approach 

“Unless it's expressed in the agreement, I think there would be difficulty in taking the position that it could be done, because it's not a common law entitlement to do a temporary layoff.”

Communication during temporary layoffs

Ultimately, if the temporary layoffs are allowed and carried out, there are a few best practices to keep in mind.

For one, employers should provide clear written notice of the layoffs and maintain open communication throughout the layoff, says Bhalloo: “Explain the reason why, the expected duration of layoffs — if that's something that's known to the employer — and any applicable recall terms.

Transparency is highly recommended, he says, “because you build trust with the employee even under difficult circumstances.”

And if possible, the employer should continue benefits during layoffs, says Bhalloo.

“While it's not mandatory, at least not in British Columbia, continued benefit coverage during the layoff period may help demonstrate good faith. It may also mitigate risk of constructive dismissal claims, because they look at you as an employer… in trouble, but you're still trying, you're helping them out to the extent you can.”

Maintaining open communication with employees during the layoffs is a good idea, agrees Dales, even if not legally mandated, to give people an idea of what’s going on with their employer.

However, she cautions against setting unrealistic expectations: “You want to be careful not to set expectations that there will be a return when you really don't know yet what the return date would be.”

Returning to work after layoffs

When the temporary layoff ends, employees can typically return to their previous roles without signing new agreements — so long as the layoff period complied with the ESA and the contract.

“No new document or agreements are needed. They'll just return to their regular position,” says Dales.

But if an employee is returned to a fundamentally different role following a temporary layoff, without their agreement or proper notice, “then it is possible that the employee may try to assert constructive dismissal,” she says.

And if the person has found a new job during the temporary layoff, and they don't want to come back to their recalled position, it would be treated as a resignation, says Dales, adding “there's still a question mark around the severance pay entitlement.”