By Andrew Tremayne - Tuesday, June 30th, 2009

As the current global economic crisis persists, many employers are forced to consider a realignment of their organization in order to meet their business objectives. Reducing employment costs, from changing the terms of employment, to downsizing the workforce, are often difficult prospects, and are accompanied by numerous legal issues that employers must be aware of.

Changing the terms of employment and constructive dismissal

If the employer has sufficient authority, for example under the employment contract or letter of offer, the employer may be permitted to change some of the terms of employment unilaterally. Depending on the nature of the change, however, this type of action may give rise to a claim of constructive dismissal by the employee and result in damages equal to reasonable notice payable by the employer.    
 
A constructive dismissal claim may arise where the employer makes a unilateral, fundamental change to an essential term of the employment contract, such that the original employment contract is terminated. Significant changes to the following terms may constitute constructive dismissal:

• hours of work
• compensation and/or bonuses
• benefits and disability plans
• duties and responsibilities
• location of work

An employer may avoid constructive dismissal claims by providing the employee notice of the change equal to the amount of notice that the employee would be entitled to in the event of a termination. The employer must clearly state that the employment will be terminated if the change is not accepted. The employer therefore terminates the current employment with notice, and offers new employment under the changed terms.  

Work-share programs

As an alternative to downsizing, organizations may consider the Work-Share adjustment program administered by Service Canada. This program helps organizations avoid temporary layoffs when there is a prolonged reduction in the level of business activity. Subject to the eligibility criteria, an employer and employee may agree to enter a Work-Share Agreement. The employee’s work week is reduced by one to three days and the employer pays reduced wages accordingly. Service Canada arranges for Employment Insurance benefits to compensate the employee for the reduction in wages. Find out more about Service Canada’s Work-Share Program.

Temporary lay-offs

The Ontario Employment Standards Act 2000 (“ESA”) permits an employer to lay-off employees for 13 out of 20 weeks without triggering termination. Where certain conditions are met, such as where the employee continues to receive benefits, the employer may be permitted to lay off employees for 35 out of 52 weeks. Organizations should be aware that unless they have an express or implied right to lay-off, or unless lay-offs are common practice in their particular industry, temporary lay-offs may give rise to a claim of constructive dismissal by the employee.

Termination

Employers that terminate employment must provide notice to the employee. The ESA provides the minimum entitlement of one week notice per year of service up to a maximum of eight weeks.  The employment contract may provide for a greater notice period than the ESA, and if so, the employer will be required to provide the contractual notice period. If the employment contract is silent in respect of the notice period, the employee is entitled to common law notice. Common law notice is usually substantially longer than the statutory minimum, and is determined by various factors including the character of employment, the length of service, the age of the employee, and the availability of similar employment. During economic downturns this last factor in particular may operate to increase notice periods, since in most cases it will take employees longer to find alternate similar employment.

In addition to the statutory notice periods, some Ontario employers may be required to provide severance pay upon an employee’s dismissal. Similar to the statutory notice periods, the amount of severance required under the ESA is based on the number of years of service. Ontario employers are required to provide severance pay if they have an annual payroll greater than $2.5 million, or if they are terminating more than 50 employees in a six-month period as a result of a “permanent discontinuance of all or part of the business.” In order for an employee to qualify for severance pay, the employee must have five years of service. The severance pay is equal to one week’s pay for each year of service up to a maximum of 26 weeks.

Mass terminations

The ESA also provides for notice requirements in the event of mass terminations. An employer must provide eight weeks of notice if it terminates 50 to 199 employees; 12 weeks of notice if it terminates 200 to 499 employees; and 16 weeks if it terminates more than 500 employees. In order to trigger these ESA requirements, the terminations must occur within a four-week period. As a result, where employers have advance knowledge of the mass termination, they may stagger the terminations over a period longer than four weeks in order to avoid the numerical and time thresholds that will trigger the ESA notice requirements.

In our view

Employees are also aware of the current economic climate and are often willing to work with employers to cut labour costs to avoid downsizing and restructuring. Chrysler’s recent agreement with its Canadian workforce, in which various benefits were reduced but hourly wages remained the same, is an example of this. Organizations may seek to reduce compensation or benefits, hours of work, or perks such as paid parking or company cars, by renegotiating the terms of employment with employees. Once again, however, the risk of constructive dismissal claims may arise. In order to mitigate this risk, employers must seek the agreement of the employees and should attempt to apply the changes uniformly across the workforce.

Category: Expert Advice.
Industry: Retail, Technology, Services
Functional Area: Hr, Finance
Tags: constructive dismissal, Employment Standards Act, ESA, lay-off, Service Canada, termination, workforce management