When is a Temporary Layoff Allowed? When is it a Constructive Dismissal?

Amid the COVID-19 pandemic and the significant economic disruptions on businesses across Canada, many employees were either terminated from their employment, or were placed on “temporary layoff” by their employers. While it may seem reasonable for employers to ask their employees to stay home while the business is shut down temporarily due to circumstances beyond its control (given that it was due to a government-imposed quarantine), employment law does not view it that way.

As discussed more below, in Ontario, an employer generally does not have an absolute right to issue temporary layoffs – even when the economic or external circumstances leave it no other practical choice. However, any issues with the fairness of a temporary layoff or, as discussed below, a claim Constructive Dismissal, must be made carefully with the assistance of an employment lawyer reviewing the circumstances of each particular case.

What is a Temporary Layoff?

A temporary layoff occurs when an employer lays off an employee off for only a temporary period of time, without formally ending the employment relationship (which would otherwise be considered a “termination of employment”). In other words, the employer temporarily reduces an employee’s working hours and compensation, but the employment relationship itself is not severed.

When a business experiences significant financial disruptions, a temporary layoff of employees is usually one of the first tools an employer will consider, particularly when the business slowdown is expected to be temporary (i.e., there is no permanent shutdown of the business). However, as with many other aspects of Ontario employment law, employees are protected from unilateral temporary layoffs by employers through various legal rules and requirements that employers must be mindful of and respect.

What Reasons do Employers Have for a Temporary Layoff?

In most cases, an employer imposes a temporarily layoff for financial reasons, including a business slowdown. For instance, an employer may not have enough work to provide its employees with continued permanent employment, or the very nature of the industry is seasonal (e.g., a construction worker), and the employer wishes to preserve financial capital by reducing payroll costs (since the employee is not being paid their regular salary/wages during the temporary layoff). The general purpose of a temporary layoff to allow an employer to manage a temporary disruption in its business operations, while not employee will be recalled within a certain period of time without terminating employment (which could result in significant costs for employee severance packages, as well as a shortage of labour when business resumes normal operations).

How Long Can a Temporary Layoff Last?

In Ontario, a temporary lay-off cannot last longer than 13 weeks in a consecutive 20-week period. This is the maximum length under the applicable employment standards legislation, the Employment Standards Act, 2000 (“ESA”). If the temporary lay-off lasts longer than 13 weeks, the law assumes the employee has been terminated and, in that case, the employee will likely be entitled to receive pay in lieu of notice and severance from their employer.

Under the ESA, however, there are some situations where a temporary lay-off can be longer than 13 weeks. In fact, a temporary lay-off can last up to a maximum of 35 weeks in a period of 52 consecutive weeks if an employer, such as if the employer:

continues to pay the employee’s salary, health benefits or pension plan; or
provides the employee receives supplementary unemployment benefits (or a “top-up payments” in addition to regular EI benefits);
the employee both agree to go on a maximum 35-week lay-off.

If any of the above (or other) situations apply, but the employee is laid-off for longer than the maximum 35 weeks, the employer is considered to have terminated the employee’s employment. As a result, the employee is generally entitled to termination pay and severance pay.

When is a Temporary Layoff Allowed?

In Ontario, an employer does not have an automatic right to place an employee on a temporary layoff, even where the layoff is due to a broader economic downturn or business downsizing. In fact, in order for a temporary layoff to be lawful, the employee must generally have explicitly agreed and signed off on an employer’s right to impose a temporary layoff as part of a written employment contract with the employer. This rule generally applies regardless of the recent change to the ESA allowing employers to temporarily lay off their employees under the new “Infectious Disease Emergency Leave“.

When Does a Temporary Layoff Become a Constructive Dismissal?

As discussed above, unless an employer can rely on an employment contract signed by the employee that specifically allows a temporary layoff, it will generally be considered a Constructive Dismissal. In that case, the employer’s unilateral temporary layoff will entitle the employee to common law reasonable notice or severance pay (severance package).

What is a Constructive Dismissal? Put simply, a Constructive Dismissal refers to a situation where an employer makes a significant negative change to an important term or condition of an employee’s job, without the employee’s actual or implied consent. For example, other than a temporary layoff that is not allowed in the employee’s employment contract, a constructive dismissal could include a significant reduction in the employee’s salary, position or authority.

During the ongoing COVID-19 pandemic, some employees who were placed on a temporary layoff may be able to claim they were “constructively dismissed” from their employment – although this will depend on each person’s unique circumstances, such as whether they signed a written employment contract that allows the temporary layoff.

As one court put it regarding a temporary layoff (Damery v. Matchless Inc., 1996 CanLII 5518):

With respect, it is difficult to understand how an “indefinite term lay-off” does not amount to “repudiation by the employer of the employment contract”. In an employment contract, the essential elements are the offer by the employee to work and by the employer to provide work and to pay compensation. Absent a provision permitting the employer to suspend the obligation to provide work for an indefinite term, even with an undertaking to recall upon work being available, the effect on an employee is really no different than in a termination where the employer undertakes to rehire, if a position later becomes available. In each case, the employee is at the mercy of the employer.

Case in Point

The courts have generally confirmed the rule that, without a contractual right to a temporary lay-off in an employment contract, the fact that an employer follows the requirements for a temporary layoff under the ESA does not mean it will not be considered a Constructive Dismissal. For instance, in the case of Bevilacqua v. Gracious Living Corporation, the court held that even though the employer complied with the maximum temporary layoff times allowed in the ESA by continuing to pay the employee their benefits during the temporary layoff and recalling them back to after 3 months, the temporary layoff was not authorized by the employee in an employment contract. Accordingly, the unilateral layoff was a Constructive Dismissal entitling the employee to a severance package, regardless of whether it was done in compliance with the ESA.

In such cases, the employee may be able to seek damages from the employer for wrongful dismissal. In other words, the employee could pursue their full entitlements in the form of severance pay (or termination pay). Exactly how much severance pay an employee is entitled to receive for constructive dismissal (or wrongful dismissal), is calculated by looking at several factors about the employee’s work history with the employer .

Key Takeaway for Employees

In Ontario, employers effectively need an employee’s authority to impose a temporary layoff. Without authorization in an employment contract, the employee may be able to claim a Constructive Dismissal and obtain their legal entitlements to proper termination pay and severance pay from the employer. In situations where an employee is asked to accept a temporarily lay off, or have been laid off by their employer, it is important to speak with an employment lawyer to review their rights and options.

Key Takeaway for Employers

There is no freestanding legal right that entitles Ontario employers to lay off an employee, even for a brief period of time because of business disruptions, possibly not even as a result of the Coronavirus pandemic. Therefore, if employers who wish to preserve their ability to impose a temporary layoff in certain situations, it is prudent have an employee sign an enforceable employment contract that allows for it. Otherwise, even if a layoff is intended to be temporary, the employer may be responsible for paying the employee severance pay as a result of an employee’s constructive dismissal claim.

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