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Layoffs and COVID-19: Isolating the Issues

The author is grateful to Nikolay Chsherbinin for his valued comments in the preparation of this blog.

Given the unprecedented disruption wrought by COVID-19 in Ontario and around the world, both employers and employees may be asking themselves the following questions:

  1. what is the difference between a layoff and being dismissed?
  2. does an employer have a statutory or common law right to lay off an employee absent a contractual provision explicitly or implicitly permitting layoffs to take place? and
  3. can an employee claim that a “layoff” is really wrongful dismissal and seek damages?

Let’s review the facts on the ground and the law.

The global pandemic has impacted both employers and employees alike. With falling revenues as well as the continued economic uncertainty surrounding COVID-19, many employers are using temporary layoffs in an attempt to get through the crisis. Given the scale of the economic disruption, laid off employees may find it difficult to secure other forms of employment. While the immediate financial benefits to the employer may seem appealing, an aggrieved employee affected by a temporary layoff may initiate litigation which has the potential to last until long after the virus has been contained. This blog will examine temporary layoffs from the perspective of an employer as well as the employee.

What is a layoff?

Layoffs are spells of employees’ temporary unemployment. The Supreme Court of Canada has stated that a layoff is “a cessation of employment where there is the possibility or expectation of a return to work. The expectation may or may not materialize. But because of this expectation, the employer-employee relationship is said to be suspended rather than terminated”1. A temporary layoff has also been described as “a temporary or permanent cessation of work, but not of employment if the layoff is temporary or has not become permanent by operation of law…2” The courts have stated that a reduction in overtime opportunities does not amount to a layoff.3

The Employment Standards Act 2000 (the “ESA”) defines a temporary layoff at section 56(3.1) as follows:

an employee who has a regular work week is laid off for a week if,

(a) in that week, the employee earns less than one-half the amount he or she would earn at his or her regular rate in a regular work week.

Given that the ESA contains temporary layoff provisions, the ESA can mislead employers that it confers on them the power to temporarily lay employees off.  As a consequence, many employers have invoked, albeit to their peril, the ESA as a shield to argue that an employee is not entitled to wrongful dismissal damages due to the employer’s strict compliance with the ESA. There is a substantial body of law which holds that a layoff is only authorized (and the ESA will only apply) where layoffs are expressly or impliedly permitted under an employment contract or otherwise authorized in the employment relationship.

Common-law

Under the common law, an employer has no right to lay off an employee unless it is permitted under the employment contract4.  The Court of Appeal in Elsegood v. Cambridge Spring Service 2001 Ltd. examined whether common law wrongful dismissal damages are available to employees whose dismissal was triggered by the operation of the ESA due to a prolonged layoff. The court determined that dismissed employees’ entitlements are not confined to remedies under the ESA and that common law concepts of reasonable notice would apply. In this regard, the court explained:

“[a]t common law, an employer has no right to layoff an employee. Absent an agreement to the contrary, a unilateral layoff by an employer is a substantial change in the employee’s employment, and would be a constructive dismissal5

Elsegood follows a line of case law which holds that a unilateral layoff by the employer amounts to a repudiation of a fundamental term of the employment contract (e.g. to be employed at an annual salary for an indefinite period).6

Under common law, an employee who has been laid off where layoffs are not expressly or impliedly permitted in the contract of employment, may commence a wrongful dismissal action against his or her employer for damages.7

Employment Standards Act

The ESA sets out the minimum standards for most employees working in Ontario. In certain situations, the ESA also governs layoffs. Employers are not required under the ESA to provide employees with a written notice of a temporary layoff, nor do they have to provide a reason for the layoff.

Under the ESA (s.56), a layoff becomes a dismissal where it exceeds 13 weeks within 20 week period and/or 35 weeks within 52-week period provided that health benefits are continued during the latter period8.

If an employee is laid off for a period longer than a temporary layoff as set out above, the employer is considered to have terminated the employee’s employment. Generally, the employee will then be entitled to termination pay.

The ESA seeks to protect employees from unscrupulous employers who may seek to avoid paying severance or other liabilities that may arise from terminating the employment relationship. The Court of Appeal stated:

The evident purpose of s. 54 is to prevent employers from avoiding the liabilities that flow from terminating the employment of employees under the guise of placing them on indefinite layoff. The legislature has provided that when a layoff reaches 35 weeks in 52, the employee is terminated.9

The ESA and the common law

Do the structured temporary layoff provisions contained in the ESA (noted above) mean that an employee cannot sue for wrongful dismissal under the common law during the temporary layoff period?

The Ontario Court of Appeal looked at this question in Motion Industries (Canada) Inc. v. McCarthy.10 The employee in Motion Industries was a salesman who worked in the mining industry for his employer. Following the 2008 global financial crisis, which resulted in major work force downsizing, the employee requested the opportunity to take some time off and agreed to a 35-week layoff. However, even though the employee was recalled before the end of the temporary layoff period, the position he was given was fundamentally different. The employee sued for wrongful dismissal under the common law. The employer argued that an employee could not bring an action for wrongful dismissal on account of section 56(4) of the ESA. Section 56(4) of the ESA states:

(4) An employer who lays an employee off without specifying a recall date shall not be considered to terminate the employment of the employee, unless the period of the lay-off exceeds that of a temporary lay-off.

The Ontario Court of Appeal determined that it was “unable to accept the proposition that the language of s. 56(4) is capable of excluding the possibility of constructive dismissal”.11

Following the Court of Appeal’s decision in Elsegood v. Cambridge Spring Service 2001 Ltd., employers should be aware that common law wrongful dismissal damages are available to employees where their termination was triggered by the operation of the ESA.

A cautionary note

Most of the cases involving these issues follow the Court of Appeal’s reasoning in Motion Industries.  However, those litigating the issue should review the Ontario Superior Court of Justice decision in Trites v. Renin Corp.12 The court’s remarks are arguably obiter,13 however they envisage an entirely different interplay between the ESA and the common law on the issue of temporary layoffs. The court stated:

“In my view, there is no room remaining at law for a common law claim for a finding of constructive dismissal in circumstances where a temporary layoff has been rolled out in accordance with the terms of the ESA.”

As such, these are complicated issues.  Whether a temporary layoff is authorized or amounts to constructive dismissal often turns on the facts specific to the particular fact situation.

Footnotes
  1.   Canada Safeway Ltd. v. R.W.D.S.U., Local 454 1998 CarswellSask 298 Supreme Court of Canada at para 73
     
  2.   Hamilton (City) and CUPE, Local 5167 (Simon), Re (2012), 2012 CarswellOnt 15527 (Ont. Arb.) at para. 31 Surdykowski (Member)
     
  3.   London and District Catholic School Board and CUPE, Local 4186, Re (2013), 2013 CarswellOnt 4490 (Ont. Arb.) at para. 110, 119 Trachuk (Member)
     
  4.   Chen v. Sigpro Wireless Inc. (2004) CarswellOnt 2225 at para 12 “The law is clear that the imposition of a lay off where there is no express or implied term in the contract of employment permitting such, repudiates a fundamental term of the employment contract that the defendant would be employed at an annual salary for an indefinite period and thereby constitutes constructive wrongful dismissal”. Affirmed on appeal Chen v. Sigpro Wireless Inc. 2005 CarswellOnt 952 Ontario Court of Appeal
     
  5.   Elsegood v. Cambridge Spring Service 2001 Ltd., 2011 ONCA 831 (Ont. C.A.) at para. 14
     
  6.   Martellacci v. CFC/INX Ltd. (1997), 76 A.C.W.S. (3d) 566 (Ont. Gen. Div.) (1997 CarswellOnt 885 (Ont. Gen. Div.)), Justice Molloy in the General Division as it then was, in a motion for summary judgment, Stated:

    It is trite law that if an employer changes a fundamental term of employment, this may constitute constructive dismissal. It is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary.
     

  7.   Similar to damages claims generally, an employee has a duty to mitigate his or her damages arising from the termination of their employment. “Mitigation of damages” means that a person who has suffered an injury or loss should take reasonable action, where possible, to reduce the damage caused and to avoid additional injury or loss. The employee’s duty to mitigate may even give rise to an obligation on an employee to accept an employer’s offer to return to work for them. The seminal case in this area is the Supreme Court of Canada case of Evans v. Teamsters, Local 31#. Unless conditions were present which would render returning to work for the employer unreasonable, an employee could be expected to mitigate their damages by returning to work for the employer. Whether returning to work for the employer is “reasonable” will be determined on an objective standard i.e. would a reasonable person return to work for the employer. The Supreme Court emphasized that an employee should not be obliged to mitigate their damages by working in an atmosphere of hostility, embarrassment or humiliation#. In Evans v. Teamsters, the Supreme Court found that the relationship between the employee and employer was not seriously damaged and, given that the terms of employment were same, it was not objectively unreasonable for the employee to return to work to mitigate his damages. Damages for wrongful dismissal will generally be limited to an amount in lieu of reasonable notice of termination of the employment contract.
     
  8.   56 (1) An employer terminates the employment of an employee for purposes of section 54 if,

    (…)

    (c) the employer lays the employee off for a period longer than the period of a temporary lay-off.

    (2) For the purpose of clause (1) (c), a temporary layoff is,

    (a) a lay-off of not more than 13 weeks in any period of 20 consecutive weeks;

    (b) a lay-off of more than 13 weeks in any period of 20 consecutive weeks, if the lay-off is less than 35 weeks in any period of 52 consecutive weeks and,

    (i) the employee continues to receive substantial payments from the employer,

    (ii) the employer continues to make payments for the benefit of the employee under a legitimate retirement or pension plan or a legitimate group or employee insurance plan,

    (iii) the employee receives supplementary unemployment benefits,

    (iv) the employee is employed elsewhere during the lay-off and would be entitled to receive supplementary unemployment benefits if that were not so,

    (v) the employer recalls the employee within the time approved by the Director, or

    (vi) in the case of an employee who is not represented by a trade union, the employer recalls the employee within the time set out in an agreement between the employer and the employee; or

    (c) in the case of an employee represented by a trade union, a lay-off longer than a lay-off described in clause (b) where the employer recalls the employee within the time set out in an agreement between the employer and the trade union.
     

  9.   Elsegood v. Cambridge Spring Service 2001 Ltd., 2011 ONCA 831 (Ont. C.A.) at para. 9
     
  10.   Motion Industries (Canada) Inc. v. McCarthy, 2015 ONCA 224, 2015 CarswellOnt 4791 (Ont. C.A.)
     
  11.   Motion Industries (Canada) Inc. v. McCarthy, 2015 ONCA 224, 2015 CarswellOnt 4791 (Ont. C.A.) at para 20
     
  12.   Trites v. Renin Corp., 2013 ONSC 2715, 2013 CarswellOnt 5634 (S.C.J.)
     
  13.   A judge’s incidental expression of opinion, not essential to the decision and not establishing precedent.
     

James Dunphy

The author of this blog is James Dunphy. James is an associate at Wagner Sidlofsky LLP.

This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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