Laying it All Out: Why Layoff Clauses Should be Included in Employment Contracts

August 20, 2020

In times of financial uncertainty, employers seeking to cut costs may quickly turn to temporary layoffs. From the employer’s point of view, layoffs offer an opportunity to press “pause” on its obligations to employees in the short-term while still maintaining the employment relationship in the long-term. Failing to handle layoffs properly, however, may leave the employer at risk of claims for wrongful or constructive dismissal. In non-unionized context, this risk can be avoided by including a layoff clause in the employment contract.

The law

In the unionized workplace, the process of layoff and recall is generally set out in the collective agreement. In the non-unionized workplace, the situation can be more complex as the parties’ rights and obligations are governed by the common law, the employment standards legislation, and the employment contract.

Employers may be surprised to learn that they do not have a general right to impose a temporary layoff. At common law, the concept of “layoff” does not exist.  An employee is either employed or not employed. The Court in Nuala MacDonald-Ross v. Connect North America, 2010 NBQB 250 explained this principle as follows:

“Because the employee who loses his or her employment in a non-union setting usually has no right to be re-employed once his or her employment is terminated, the term “layoff” in the non-union setting has no technical meaning. It is simply a euphemism which connotes loss of employment without attribution of wrongdoing to the employee. It is often used to explain loss of work through reduction in the work force or plant closure and always means the employee is no longer actively at work. The law of employer and employee does not have a middle ground between employment and termination …” [emphasis added]

It is important to note that while employment standards legislation may address temporary layoffs, it does not grant employers the right to impose them unilaterally. Rather, the legislation sets out the minimum standards an employer must meet if a right to layoff is granted, either expressly or impliedly, by the employment contract, or if the employee otherwise agrees to a temporary layoff.

An implied right to layoff arises where the facts show that the parties intended for there to be a right of layoff even if it is not written into the employment contract. Examples of circumstances in which Courts have found an implied right to layoff include:

  • where layoffs or breaks in service are common in the industry (e.g. seasonal industries),
  • where the particular employer has a history of temporary layoffs, or
  • the employee was put on notice that layoffs are a possibility.

Courts have also been clear that the general rule in the non-unionized context is that a layoff constitutes constructive dismissal and there are but a few limited exceptions. Courts are wary of an employer’s claims to an implied right to layoff, as these are often viewed as an attempt by the employer to avoid the statutory notice or payment in lieu that would flow from a termination.

The practical consequence for employers is that a temporary layoff is not the simple solution it may appear to be. Fortunately, employers can mitigate the risks associated with temporary workforce reductions by specifically reserving the right to temporarily lay off employees in the employment contract. Such clauses provide clarity and certainty for employers, employees, and courts.

Layoff clauses can also be tailored to the needs of the particular employer and employment context. In some circumstances, a standard-form layoff clause that reserves to the employer the right to place the employee on a temporary, unpaid layoff in accordance with the applicable employment standards legislation may be sufficient. In other circumstances, the employer may wish to take a more comprehensive approach, addressing issues such as:

  • the circumstances in which a layoff may be imposed;
  • the procedure to be followed for both layoff and recall;
  • factors that will be considered in choosing which employees are laid off and recalled (e.g. seniority, merit, ability, record of performance);
  • when notice will be given to the employee;
  • how long the layoff may last; and
  • entitlements (if any) that will continue during the layoff period.

Take-aways for employers

A clearly drafted layoff clause in an employment contract gives an employer the flexibility to temporarily reduce its workforce while avoiding the risk of a claim for constructive dismissal.

Employers should seek legal advice prior to laying off non-unionized employees, especially if layoffs are not addressed in the employment contract.

If an employee’s contract does not include a temporary layoff clause, the employer and employee may agree to a temporary layoff, provided the agreement respects the minimum standards in the applicable employment standards legislation. The best practice is to have such agreements in writing.

Employment contracts can be amended to add a temporary layoff clause, but the employer will be required to provide the employee with additional consideration (i.e. a benefit) in exchange for agreeing to what is a more onerous term of employment.

 

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