The Hidden Costs Of Workforce Restructuring During Economic Downturns

Understanding employment law obligations when reducing staff or adjusting compensation

Recent economic uncertainty—driven by tariffs threatened and imposed by the United States—has created significant challenges for Canadian businesses. Disrupted supply chains and rising costs have forced many employers to adjust their workforces to ensure their continued viability and success.

As employers respond, employment law considerations must be central to avoid compounding the legal risks already posed by economic instability. This article outlines key legal factors employers should consider when making workforce adjustments to balance business needs with compliance.

Legal Considerations for Temporary Workforce Adjustments

The employment relationship in Canada is a contract. As with any contract, neither party has the right to unilaterally change the terms of the employment relationship—even when the reasons for the proposed change are compelling. 

During the COVID-19 pandemic, many employers learned the hard way that they do not have an automatic right to make quick and dramatic changes that make sense in the face of a crisis. Even where changes are made equally or equitably across the entire workforce, those changes can have unintended and dramatic effects on the employer’s legal obligations to its employees. Actions such as reducing compensation, adjusting work hours or imposing temporary layoffs can sometimes constitute a breach of the employment contract, potentially leading to claims of constructive dismissal. ^[1]

How to assess the risk of constructive dismissal when adjusting to the effect of tariffs

Employers must determine if they have the right to unilaterally reduce hours of work and compensation or institute temporary layoffs. Check your employment agreements! Some employers have negotiated the right to reduce compensation, adjust work hours/wages, and impose temporary layoffs in the face of business changes. However, many have not expressly negotiated those rights. 

Despite employment standards legislation containing temporary layoff provisions, there is no automatic right to temporarily lay off employees. Employers must have an express right in the contract of employment (written or unwritten) or be able to prove an implied term to avoid the consequences of a constructive dismissal claim based on a breach of the contract of employment.

However, not all breaches constitute constructive dismissal. The significance of the breach determines whether the employee can resign and sue for wrongful dismissal or merely have a claim for damages equal to the difference between what should have been paid and what was paid.

Conventional wisdom suggests a change in compensation of 10% or more is a constructive dismissal. However, there is no binding authority that says a change of less avoids the risk of a claim, and that threshold is uncertain. It is likely that a 25% pay cut over any period would be considered a constructive dismissal, even though that level of cut over three months constitutes only an annualized cut of 7.5%. Employers implementing a compensation reduction would be wise to avoid any cut greater than 10% as compared to the prior pay period for any duration.

How great is the risk of a claim?

Existing employees are less likely to sue their employer. Most employees will accept the compensation adjustment or layoff without express complaint. They may begin a search for replacement employment but are not likely to commence a formal claim while employed.

Those employees who are otherwise dissatisfied with their employment, or seeking to leave for whatever reason, may take the opportunity created by the alleged breach of contract to take the position of constructive dismissal. This opportunism can be devastating to the unsuspecting employer because it is often the longest-serving and oldest employees who are prepared to resign and sue. These employees are generally the most expensive to terminate without just cause because they are entitled to the greatest amount of common law notice of termination/pay in lieu of notice (up to 24 months), and older workers are recognized to have more difficulty finding comparable replacement employment which would otherwise mitigate their damages.

Employers who are merely seeking to reduce their labor costs by 10% can find themselves immediately owing 24 months’ pay to multiple employees. This unforeseen liability can be devastating to an employer already facing challenging financial circumstances.

Legal Considerations for Terminations

Some employers will make the decision to terminate the employment of one or more employees in response to the business effects of the tariffs. Those employers must adhere to minimum statutory notice/pay in lieu of notice requirements, and severance pay requirements if applicable. The extent of the liability may be determined by written employment agreement termination provisions or common law reasonable notice obligations.

In Ontario, if an employer terminates the employment of 50 or more employees within a four-week period, it will be considered a mass termination, subject to the mass termination rules under the Employment Standards Act, 2000. In mass termination scenarios, the amount of statutory notice employees are entitled to receive is the same for all employees and increases based on the number of employees who have been terminated ^[2]. Additionally, the employer must notify the Ministry of Labor of the terminations. Adherence to the statutory process is critical as notice of termination provided to employees prior to notice to the Ontario Ministry of Labor is ineffective.

Strategies for Mitigating Legal Risks

To mitigate these risks, employers should:
 

• Review existing employment contracts to determine whether they include provisions allowing for adjustments in compensation, work hours and temporary layoffs. Updating contracts to reflect these rights can help mitigate legal risks during future economic uncertainty.
• Maintain regular communication with your employees, informing them of any changes whenever feasible. Employers should articulate the reasons for adjustments and how they align with business priorities. This can assist in managing employee expectations and mitigating the potential for legal disputes.
• Consult with legal counsel before taking any significant steps. Legal counsel can help employers understand their rights and obligations, ensuring compliance with relevant employment laws and minimizing risks.

Takeaways

Balancing business priorities with legal compliance during economic uncertainty requires careful planning and consideration. Employers must be proactive in reviewing employment contracts, communicating transparently with employees, and seeking legal advice where possible to mitigate risks. By taking these steps, businesses can navigate economic challenges while maintaining compliance with employment laws.

Footnotes
^[1] Constructive dismissal occurs when an employer unilaterally imposes a substantial change to a fundamental term of an employee's employment without the employee's consent, resulting in a breach of contract. In cases of constructive dismissal, the employee is entitled to treat the contract as wrongfully terminated, resign, and seek damages for wrongful dismissal.
^[2] If an employer terminates 50 or more employees at an establishment within a 4-week period, it must provide the following: 8 weeks’ notice if 50 to 199 employees are terminated; 12 weeks’ notice if 200 to 499 employees are terminated; and 16 weeks’ notice if the employment of 500 or more employees are terminated (O. Reg. 288/01 at s. 3(1)).

	Christopher M. Andree is a Partner at Gowling WLG.
	Andrea Leung is an Associate at Gowling WLG.