Serving notice in economic dismissals

Dismissing employees for financial reasons may be justified but could lead to greater notice requirements in a poor job market

More notice to cut payroll

One of the most common solutions companies consider during an economic downturn is cutting staff, something that’s been quite evident from the hundreds of thousands of jobs that have been lost in the recent recession. Sometimes this course of action is chosen among several cost-cutting options or sometimes there’s no other option. Either way, it’s important for employers to consider how much the same economic conditions that lead to job cuts affect fired employees’ chances of finding another job. If the pickings are slim, it could mean the employer is on the hook for a larger notice period or severance package.

Toronto-based employment lawyer Nikolay Chsherbinin examines the effects a recession can have on an employer’s obligations to employees whose jobs are cut as part of a company’s cost-cutting measures.

With thousands of job casualties being claimed each week by the wounded economy, buzzwords like downsizing, corporate reorganizations, economic restructuring and layoffs are becoming increasingly ingrained in employers’ minds. By contrast, ambushed by employers’ unpreparedness to survive another recession, employees frantically search the Internet in the hope to understand concepts of wrongful dismissal, litigation, legal costs and, especially, what constitutes a reasonable notice period.

But just how does the recessionary economy impact on the employees’ reasonable notice entitlement? To answer this question one should first understand that notice is the information that employment will end on a certain date. The purpose of notice of impending termination is not to pay, but to give employees the chance to arrange their affairs and try to find new employment.

The question of common law notice is more complex. It requires a court or arbitrator to make a case-specific inquiry and assess its findings against the four traditional factors used to determine the period of reasonable notice as set out in Bardal v. Globe & Mail Ltd. Those factors are: age, length of service, nature of the position and availability of similar employment. An additional factor comes into play in periods marked by economic slump, which is the economy itself. Still, as the court in Bardal said, “There can be no catalogue laid down as to what is reasonable notice in particular classes of cases.”

Courts divided in their support

A survey of cases ranging from 1980 to 2009 that discussed an economic downturn as a factor in determining the period of reasonable notice revealed that, during the 1980s, courts were divided between supporting employers and employees in their discussion of economic conditions, contrasting the hardships of employees with the financial peril of employers who blamed factors “beyond their control.” Some judgments emphasized the unique perspective that law is autonomous from the economy. This approach signaled that economic conditions have little or no relevance to the employment contract.

In the 1986 case Ansari v. British Columbia Hydro & Power Authority, the British Columbia Supreme Court said, “it does not seem to me that economic considerations such as reduced business activities or opportunities should be a factor in fixing the period of reasonable notice.”

The Alberta Court of Queen’s Bench followed this reasoning a year later in Dasent v. D. Molesky Surveys Ltd.

“The condition of the economy… is a factor to consider but because of social programs and unemployment benefits that are available, it should not operate as a reason for extending the reasonable notice that is required to be given,” the Alberta court said.

In the recession of the 1990s, judgments were often characterized by rationalizations of economic dismissals based on the approach of the Ontario High Court in Bohemier v. Storwal International Inc. In Bohemier, the court recognized the need for an employer to operate in an “unfavourable economic climate.” The court found when an employee was dismissed for economic reasons, there should be a limit on the notice required.

Following this lead, courts refrained from chastising employers for discharging employees in a period with a limited job market. Rather, it appears they agreed recessionary economic conditions “required” organizations to reduce their staff. Nevertheless, in Russell v. Winnifred Stewart Assn. for the Mentally Handicapped, the Alberta Court of Queen’s Bench criticized the employer for how it responded to the new economic context and questioned the necessity of the dismissal for economic reasons.

While judges accepted the legitimacy of economic dismissals for other types of employers, they still emphasized that “a contract is a contract” and contractors upheld their end through their loyalty to the organizations.

With the latest recession, judgments continue to be pro-employee. In Munoz v. Canac Kitchens, the dismissal took place in the context of the termination of other Canac employees as a result of a steady decline in Canac’s business. Despite being advised during the trial that Canac was in the process of closing down entirely, the Ontario Superior Court of Justice found the employee, a team leader with more than 12 years of service who was 52 years old and remained unemployed 16 months after his termination, was entitled to 12 months’ notice. In January 2009, when Canada lost 129,000 jobs, the court in Mahesuram v. Canac Kitchens Ltd. awarded another employee of Canac, 59 years old with 19 years of service, 18 months’ notice.

An economic downturn will seldom serve to reduce an appropriate notice period, but may well serve to increase it if the employee cannot find alternate employment. Without supporting financial evidence, a rationale for reducing staff during a downturn to remain competitive or even viable most likely will not be received sympathetically in the courts.

Recessions in a general economy are not isolated and thus are a foreseeable event. Given the historic evidence, employees may be able to argue that a recession is never too far down the road and employers should have anticipated it and structured their employment relationships more responsibly.

For more information see:

Bardal v. Globe & Mail Ltd., 1960 CarswellOnt 144 (Ont. H.C.).
Ansari v. British Columbia Hydro & Power Authority, 1986 CarswellBC 86 (B.C. S.C.).
Dasent v. D. Molesky Surveys Ltd., 1987 CarswellAlta 499 (Alt. Q.B.).
Bohemier v. Storwal International Inc., 1983 CarswellOnt 771 (Ont. C.A.).
Russell v. Winnifred Stewart Assn. for the Mentally Handicapped, 1993 CarswellAlta 110 (Alt. Q.B.).
Munoz v. Canac Kitchens, 2008 CarswellOnt 7059 (On. S.C.J.).
Mahesuram v. Canac Kitchens Ltd., 2009 CarswellOnt 229 (On. S.C.J.).

Nikolay Y. Chsherbinin is an employment lawyer at Grosman, Grosman and Gale LLP in Toronto. He can be reached at (416) 364-9599 or [email protected]

Limiting liability through employment contracts

Ultimately, judicial interpretation of economic dismissals varies to the extent that each downturn is characterized by a different combination of rationalizations on economic dismissals. The common thread running through the recessionary periods is this: A carefully drafted employment contract will substantially reduce potential litigation. In this sense, the contract can:

•Limit employers’ liability on termination to the notice period set out in it.
•Specify that the provincial law will apply in resolving employment-related disputes, such as reasonable notice of termination.
•Define the job description, which from the employer’s perspective should be broadly based in order to avoid implication that changes in job responsibilities will result in a fundamental breach of the employment relationship. This approach could be especially helpful for employers that contemplate a merger.
•Cap incentives, benefits, expenses and severances, so these do not become troublesome in the future.
•Limit the mobility of key employees after the employment relationship ends.
•Limit the length of the employment relationship and provide for a renewal period if it is in the employer’s interests to do so.

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