The current global recession is affecting employers in Canada. These difficult circumstances may require your business or organization to consider various options that will affect employees in order to continue operating. While the Red Flag often considers formal insolvency proceeding options, this Red Flag outlines come of the labour force restructuring options that exist outside of such proceedings. These labour force restructuring options include employee layoffs and/or terminations, closure of operations, and reduction in compensation. There are opportunities to create flexible strategies for addressing workforce changes in Ontario. However, the legal landscape is complex and care must be taken when creating strategies to eliminate or minimize risks and liabilities.
The Employment Standards Act, 2000 (“ESA”) in Ontario sets out the minimum mandatory requirements which apply when employees are terminated. All employees who have been employed for more than three months, with few exceptions, are entitled to working notice of termination or pay in lieu of notice of termination:
Generally the notice owed ranges from 1 week up to a maximum of 8 weeks, depending on the length of employment.
However, if an employer is terminating 50 or more employees in a 4 week period, the “mass termination” rules of the ESA require 8, 12, or 16 weeks of notice or pay in lieu of notice for all employees depending on the total number of employees whose employment is terminated.
Employees may also be entitled to severance pay under the ESA of one week per year of service up to a maximum of 26 weeks if: 1. the employee has 5 or more years of employment; and 2. the employer either has an annual payroll of at least $2.5 million or the employer has severed 50 or more employees in a six month period due to the permanent discontinuance of all or part of the business at an establishment.
Employers with non-unionized employees must also consider the common law obligations for reasonable notice of termination which generally significantly exceed the notice required by the ESA. Employers with unionized employees may have collective agreements that contain provisions that provide employees with enhanced entitlements that are triggered by mass layoffs and/or closures.
Under the ESA, an employer can place an employee on a “temporary” layoff and not trigger termination obligations if:
The layoff does not exceed 13 weeks in a 20 consecutive week period:
The layoff exceeds 13 weeks but the employer meets certain conditions and the layoff is less than 35 weeks in a 52 consecutive week period. However, a termination will be triggered if the layoff is longer than the ESA temporary layoff period. If this occurs, the employee is deemed terminated as of the first day of the layoff. Pay in lieu of notice of termination will be owed to the laid off employee(s) in such circumstances.
Although the ESA permits temporary layoffs, placing non-unionized employees on temporary layoff may result in a constructive dismissal at common law if layoffs are not an express or implied term of the employment contract. Generally, layoffs are part of a unionized work environment although a collective agreement will generally have special rules about layoffs e.g. by order of seniority.
Reduction in Compensation
Reducing wages, benefits, and other terms and conditions of employment are options that may be preferred by an employer and employees to terminations or layoffs in order to continue operations. However, an employer who unilaterally alters a fundamental term of the employment contract such as wages or benefits could be found to have constructively dismissed the employee. Whether a reduction may lead to a constructive dismissal claim will depend on the circumstances. Employee acceptance of any reduction in compensation is integral to minimizing the risk of a successful constructive dismissal claim. In some circumstances, notice of the reduction and/or termination to the employee may be required in order for the reduction to be legally valid.
Liability of Directors
Under the ESA, directors of an employer are jointly and severally responsible for: wages, vacation pay, public holiday pay, and overtime pay. This liability can arise in a bankruptcy or court-appointed receivership. Directors are not responsible for termination and severance pay under the ESA. The liability of directors is limited to debts totalling six months of wages for each employee that become payable while they are directors. Vacation pay liability is limited to vacation accrued for up to twelve months.