Beware of claims for constructive dismissal after temporary layoffs
Imagine this scenario: There is a worldwide pandemic, the global economy is devastated, and all non-essential businesses are ordered to shut down. You are able to continue a small portion of your business, but revenues drop by 75 per cent and you don’t need most of your employees. You consult the employment standards legislation, confirm the rules regarding how layoffs are to be implemented, and then lay a significant portion of your staff off temporarily.
The next thing that happens is that several of your employees go see an employment lawyer and threaten to bring a claim for constructive dismissal because you did not have the right to impose temporary layoffs.
Are they right?
If you are like most employers, they probably are. Most employers do not use employment contracts strategically. Many of their employees don’t have contracts at all, or if they do, they are signed after the employee was already hired (rendering the contract unenforceable in most cases), and very few contracts include temporary layoff clauses.
As a result, you may well be on the hook for substantial damages, since a constructive dismissal triggers the same severance obligations as a “regular” dismissal. The savings you achieved through the layoffs may be much less than the costs you incur as a result, especially when you add your legal costs.
Contrast that scenario with other employers: There was a worldwide pandemic, the global economy was devastated, and all non-essential businesses were ordered to shut down. They had to lay some or all of their workforce off temporarily. They contacted us, and we confirmed that the contracts we helped them implement give them the right to do so. As a result, they laid off employees without fear of liability for constructive dismissal.
Others came to us because they had to lay employees off but did not have a temporary layoff clause. We worked with them to implement layoffs with the agreement of the employees, which is the second-best way to implement a layoff without risk of a constructive dismissal claim.
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Employment contracts provide flexibility and reduce labour costs
For most of my career, I have been encouraging employers to use employment contracts strategically. I often say that it will help you to reduce labour costs, minimize risk/liability, and maximize your rights/flexibility. That is no less true today than it was in the past. But the COVID-19 pandemic has provided a compelling example of an often-overlooked way in which a well-drafted contract can help: temporary layoff clauses.
First, as discussed above, a contract with a temporary layoff clause gives an employer the flexibility to lay people off temporarily. Otherwise, the law has always been clear: Employers do not have the right to impose temporary layoffs.
There is a compelling argument that our courts will treat temporary layoffs differently in the context of these unprecedented circumstances and acknowledge the impossible position many employers have been put in. That may be true, but it has not happened yet, and I submit that it is better to know that you have the right to lay someone off rather than lay them off now and take your chances.
Employment standards legislation establishes how temporary layoffs are to be implemented, but it does not give employers the right to do so. That right must be founded in contract. A simple clause can achieve this goal, but it must be properly implemented.
Second, a termination clause can be used to limit severance costs and to avoid the uncertainty of “reasonable notice”. In the current circumstances, that could mean tremendous savings for businesses that decide to permanently reduce their workforce (or shut down completely), as well as businesses that impose layoffs and find themselves facing a constructive dismissal claim. In either case, the termination costs will be reduced.
Contrary to popular belief, every employee in Canada has a contract of employment. If there isn’t one in writing, then the contract is comprised of the terms agreed upon verbally (typically position, salary and other basic items), those established by past practice, and a host of terms implied by law, which are generally not to the benefit of the employer. Even if there is a basic “offer letter”, the law will impose other terms unless they are explicitly addressed.
Contracts and policies are your best opportunity to improve your legal position; don’t overlook them.