Oliver Flis  |  Queen’s Business Law Clinic | July 2021

Editors: Nicolas Guevara-Mann and Mikela Page

“Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society.” ~ Dickson CJ in Reference Re Public Service Employee Relations Act (Alta.), [1987] (SCC)

Introduction

As normal life ground to a halt in March 2020, the COVID-19 pandemic pushed businesses of all sizes — particularly small local employers — to the verge of perilous financial freefalls. The enactment of strict lockdown measures precipitated slumping sales, dwindling customer visits, and no foreseeable prospects for recovery. Against this dire backdrop, many employers found themselves grappling with a previously unfathomable dilemma: reduce their workforce, or risk going under for good.

In Ontario, this dilemma hit employers rather discriminately. For some employers, laying off unneeded workers was a task that could be accomplished with relative ease. For others, a workforce reduction was legally untenable. Yet the shackles constraining the latter category of employers were essentially self-imposed. Indeed, this dichotomy stems from differences in provisions that employers include — or, more consequentially, fail to include — when drafting employment contracts for their workers.

To illustrate this proposition, consider the example of a small local café owner who employs three full-time baristas, each with over ten years of service. In the wake of lockdown measures prompted by the COVID-19 pandemic, the café owner’s deteriorating financial circumstances necessitate a reduction in his workforce. Yet suppose that the employment contracts for all three of his baristas are silent on the prospect of layoffs or termination, as well as his ability to modify the contracts. At the heart of the café owner’s dilemma is one pressing question: how can his business escape its looming fate?

The Options

For our café owner (and employers in a similar predicament), three options appear facially plausible:

1. modify the employment contracts of the baristas to add a provision authorizing layoffs, or simply lay off the baristas without contractual authorization;
2. make a unilateral change to the baristas’ remuneration or hours of work; or
3. terminate the existing employment agreements and rehire the baristas on revised contractual terms, such as reduced pay or reduced hours of work.

As this piece will demonstrate, each of these options entails steep legal, financial, or personal costs — unwelcome results against which employers can insulate themselves through sound contractual drafting.

Option 1: Unauthorized Layoffs

In scrutinizing the legality of the first option, it is important to situate the definition of a “layoff” in an employment law context. According to the caselaw and employment legislation, a layoff is a temporary period during which an employer ceases to provide work — and usually pay — to an employee, on the understanding that work and pay will resume in the future.[1] The employment law definition of a layoff differs from everyday usage of the term “layoff” in one critical respect: legally, a layoff is understood to be temporary in nature, rather than permanent as common usage of the term might suggest.

Indeed, a layoff must be temporary in order to be legally valid — an indefinite or permanent layoff will, in all circumstances, be regarded as a termination of the employment contract.[2] The reasoning underlying these principles is that courts consider a layoff to be a breach of an employer’s implied duty to provide work and pay. As noted by the Supreme Court of British Columbia, “there is nothing more fundamental to a contract of employment than that the employee be employed and that he be paid for his services.”[3]

These rules are codified in section 56 of Ontario’s Employment Standards Act (“ESA”), which provides that layoffs longer than the statutory maximum of thirteen weeks in any consecutive twenty-week period effectively constitute termination of employment.[4] An employer who fails to abide by these statutory requirements can face substantial liability in the form of fines and lawsuits for constructive dismissal.[5] Yet the ESA does not itself grant employers a statutory right to lay off employees. Rather, the thirteen-week restriction in the ESA serves only to limit the duration of a layoff in employment contracts in which that right already exists.[6] Unless an employment contract expressly or impliedly gives an employer the right to lay off an employee, the employer cannot lawfully lay off that employee.

Returning to our café owner scenario, these basic principles render the first option legally untenable. The café owner cannot add a right to lay off to his baristas’ employment contracts without providing fresh consideration — a term denoting something of value given to an employee in exchange for a modification to their employment contract.[7] Given the unequal bargaining power in most employment relationships, an employee’s consent is not sufficient for a contractual modification. Rather, the employer must give the employee something of value “beyond that to which the employee is entitled under the original contract.”[8] By implication, continued employment does not constitute fresh consideration. In times of financial peril, this option is impractical at best and impossible at worst for most employers.

In the same vein, laying off an employee without valid contractual authorization can have significant legal consequences. As summarized by the Ontario Superior Court of Justice, “[T]he imposition of a lay off where there is no express or implied term in the contract . . . repudiates a fundamental term [of the contract] . . . and thereby constitutes constructive dismissal.”[9] Constructive dismissal gives an employee the right to sue the employer for damages, opening the door for substantial financial liability.

Option 2: Change to Pay or Hours of Work

With the first option proving legally unviable, our café owner must now give the second alternative due scrutiny. Is it legally permissible for struggling business owners to reduce the remuneration or hours of work of their employees? For this analysis, it may be assumed that the baristas’ employment contracts contain a clause which allows the café owner to make reasonable changes to their terms of employment. The presence or absence of such a provision is ultimately immaterial, as the law in this area is governed primarily by common law principles.

Struggling business owners such as our café owner may validly reduce the remuneration or hours of work of their employees, but have little room to manoeuvre in doing so. Appendix A summarizes the common law restrictions on an employer’s ability to make changes to the pay and hours of work of his or her employees. While reductions in pay of less than 10% have generally been upheld as acceptable by the courts, reductions that approach or exceed 15% have been ruled to constitute constructive dismissal.[10] Similarly, substantial reductions in an employee’s hours of work — in particular, those that exceed the parameters of a temporary layoff as defined by the ESA — have been deemed to amount to constructive dismissal.[11] In short, employers have little flexibility in modifying their employees’ pay or hours of work.

Option 3: New Employment Contracts

With the second alternative also proving unviable, our café owner must consider the third alternative: terminating his baristas and rehiring them on revised contractual terms. The main issue engaged by this option is assessing the baristas’ entitlements for notice of termination.

Section 57 of the ESA sets out statutory minimums for notice of termination. An employee’s entitlement to notice generally amounts to at least one week per year of service, up to a maximum of eight weeks.[12] However, unless an employment contract expressly stipulates that an employee’s entitlement to notice is limited to the amount of notice prescribed by the ESA (or some other fixed amount that meets the ESA minimums), the presumption of common law reasonable notice applies.[13]

Determining reasonable notice involves a complex and subjective multi-factor test known as the “Bardal factors”.[14] Among the variables considered are the character of the employment, the employee’s length of service, the employee’s age, and the availability of similar employment.[15] An employer’s financial circumstances are immaterial — they “justify neither a reduction in the notice period in bad times nor an increase when times are good”.[16] In our café owner scenario, the absence of a termination clause in the baristas’ employment contracts, coupled with the baristas’ long tenure, would likely justify a generous reasonable notice entitlement. Although legally sound, the high financial and personal costs associated with this option undermine its effectiveness.

Escaping the Employer’s Dilemma

Fortunately, an employer can “escape” the difficulties associated with the options discussed above through sound contractual drafting — namely, a carefully drafted express or implied contractual term that authorizes the employer to lay off an employee when its financial circumstances so necessitate.

A sample express term is included below. An express term is generally preferable given that it clearly defines an employer’s rights, preventing any confusion or ambiguity about the scope of those rights.

The Employer reserves the right to place the Employee on a temporary unpaid layoff in accordance with the Employment Standards Act, 2000, S.O. 2000, c. 41.[17]

Alternatively, an employer may opt to impliedly reserve the right to lay off its employees via a general variation clause. Given that courts generally interpret ambiguities in employment contracts against the employer’s interests to “provide a measure of protection to vulnerable employees”[18], a high degree of specificity may be required in an implied term so as not to inadvertently exclude the right to lay off from its scope. As illustrated by the example below, the inclusion of language such as “substantial temporary reductions to hours of work and/or remuneration” will help ensure that a court does not read down a modification clause against the employer’s interests.

The Employer has the right to make reasonable changes to terms of employment, including substantial temporary reductions to hours of work and/or remuneration.[19]

An employer may also choose to avail itself of temporary legislative measures such as Regulation 228/20, which was enacted by the Ontario government in March 2020 to temporarily abrogate an employee’s right to a legal remedy for a layoff or constructive dismissal in two circumstances:[20]

1. a temporary reduction in or elimination of an employee's hours of work for reasons related to COVID-19; and
2. a temporary reduction in an employee's wages by the employer for reasons related to COVID-19.

In short, the Ontario government temporarily suspended the applicability of the ESA as it pertains to layoffs and constructive dismissals. Regulation 228/20 will remain in effect until July 3, 2021.[21] While the merits of denying employees the protections of the ESA on grounds as capacious as “reasons related to COVID-19” may be contested, the regulation nevertheless provides a viable option for employers like our café owner to temporarily reduce their workforce.

However, legislative measures such as Regulation 228/20 are a product of the exceptional circumstances of the COVID-19 pandemic and will not necessarily be available to employers in other situations in which the necessity of a workforce reduction may arise. The aforementioned best practices for drafting express or implied contractual terms are thus indispensable in insulating an employer against the dire dilemma experienced by our hypothetical café owner. Only through sound contractual drafting can businesses escape the employer’s dilemma and enjoy a measure of stability in their employment matters.

Appendix A: Common Law Limits on Unilateral Reductions in Pay and Hours of Work

Changes in Pay

Position of Courts	Unilateral Change by Employer	Authorities
Acceptable	Reduction in pay < 10% Fluctuation in variable pay	McSeveney v Phone Directories Co Chapman v Bank of Nova Scotia
Potentially (Un)acceptable	Reduction in pay 10-15%	Pullen v John C Preston Ltd Bennell v William E Coutts Co
Unacceptable	Reduction in pay >15% Material change to variable pay	Doran v Ontario Power Generation Inc Evangelista v Number 7 Sales Ltd

Changes in Hours of Work

Position of Courts	Unilateral Change by Employer	Authorities
Acceptable	Valid temporary layoff	Stolze v Ontario
Potentially (Un)acceptable	Material changes to overtime Material changes to travel hours	Hummel v Treaty 7 Housing Authority MacDonald v Tippet-Richardson Ltd
Unacceptable	Reduction from full-time to part-time	Davies v Canadian Satellite Radio Inc

 

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