What Small Business Owners Need To Know

Across Canada, employers are facing the tough reality of staff layoffs due to the COVID-19 crisis. Some businesses have had to slow down operations dramatically and others have completely ceased operations for the foreseeable future. Either way, cutting staff due to COVID19 is a painful reality and one that has Ottawa expecting four million applications from out of work Canadians for the newly announced Canada Emergency Response Benefit (CERB).

Are COVID Layoffs Legal?

As a small business owner, you may be wondering how this affects you? On the surface, layoffs seem straight forward and preferable to the option of terminating employees. Unfortunately, it may be more complicated than that.

One Globe and Mail article says employment lawyers are warning that “the law does not actually permit short-term layoffs.” In many cases, employees that are temporarily laid off may be entitled to claim constructive dismissal and seek severance pay.

When Are You Entitled To Temporarily Lay Off An Employee

Contracts that have a provision covering temporary short term layoffs should not have problems with layoffs. By including a provision covering temporary layoffs in your employment contracts or collective agreements (for unionized workplaces), you retain the right to temporarily lay off an employee.

You might also have an “implied right” based on past practices. In other words, if temporary layoffs are a long-standing practice in your organization, you can continue to use them as a legal vehicle in response to changes in work volume. An industry where the implied right to lay off staff may be common is in construction or other seasonal/cyclical industries.

PaymentEvolution’s resident HR expert, Carrie Thomas, breaks it down like this…

Without a layoff clause in an employment agreement, a temporary short-term layoff without pay could be construed by the employee to be constructive dismissal​, at least in a pre-COVID context. This is based on contract law and common law (i.e. how courts in Canada have interpreted these issues). This is because the employer is no longer supplying work or compensating the employee in accordance with the terms of the employment agreement.

An employer may be able to justify a layoff if they have reserved the authority to do so in the contract of employment, but in most other circumstances, a layoff amounts to a fundamental change to an important term of the contract and may be treated as constructive dismissal.

The language, “may be treated” is important here. When an employee is notified of a layoff (or any other alleged fundamental breach of contract), they have two choices:

1. they can accept and condone the change to their terms and conditions of employment (by remaining on layoff until recalled);

2. they can accept the repudiation of their contract, claim constructive dismissal and seek to receive pay in lieu of notice of termination.

However, an employee can only select one or the other.

If they elect to treat their employment as constructive dismissal, they have to resign their employment and make a claim. If they do so, they may be entitled to pay in lieu of notice, but they do not retain recall rights or any other work-related entitlement. Their employment is at an end. Moreover, if they receive pay in lieu of notice and severance (where applicable), their entitlement to EI will commence at the end of the notice/severance period.

Carrie believes that the key to this unprecedented moment is to balance the needs of the employees against those of your organization, and document decisions as much as possible. 

Some lawyers are recommending that you ask staff to agree to a temporary layoff, in writing if possible. Agreeing in advance of layoffs and in writing eliminates future risks and keeps these issues out of the courts.

We won’t know for sure how the courts will process these claims until they face them down the road. It is very likely the pandemic will factor into court decisions, but we’ll have to wait and see.

The Risks of Constructive Dismissal for Employees

Given our current state, employees who are laid off may forego a constructive dismissal claim, preferring instead to have a job to return to when the temporary measures pass.

The number of people on EI is exponentially increasing and that number is expected to grow. Given that most of the layoffs are occurring as a result of the pandemic and the economic fallout amid COVID-19, there is still the possibility that employers may be able to claim that the employment contracts of their employees have become “frustrated” due to economic and social conditions beyond the employer’s control.

In essence, with government-mandated closures and other COVID19 impacts, there is no work. In the case where working becomes an impossibility, employees would not be entitled to any termination notice, termination pay or severance pay, whether under the Employment Standards Act, 2000 or the common law.

Recommendations for Small Businesses

Ultimately, it is wise to be as familiar as possible with your obligations as an employer and understand the rights of your employees.

For example, Morgan Sim, a partner at Parker Sim LLP, “urges employers to follow the minimum rules set out in provincial employment standards legislation, which apply to temporary layoffs that have been agreed to by contract. In Ontario, for example, the rules say a temporary layoff can last no longer than 13 weeks in any period of 20 consecutive weeks or, if the employer continues to pay certain benefits, it can last up to 35 weeks in a one-year period” (Source: Globe and Mail).

Work together with your staff to understand their concerns and help them be part of the decision, recording in writing where a temporary layoff is mutually agreed upon as the path forward.

Other Supports

In fighting the coronavirus in Canada, the Government of Canada is working to bridge the gap by providing additional supports such as a 75% wage subsidy, employment insurance, and the newly announced CERB for those who do not qualify for EI.

Stay Tuned

Our HR experts can help you mitigate this risk and provide support in the form of lay off letters.  Send us your questions, book time with our HR experts (HumanExperience@PaymentEvolution.com), and stay tuned for updates to the PE Blog.​​

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  • Sam Vassa

    With a passion for technology, Sam looks for ways to help small companies to compete and save money. He's worked in Foreign Affairs for the Government of Canada, geeked out at Digital Equipment Corp and hung out at Microsoft. He founded PaymentEvolution.com to help businesses like yours.

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