Layoffs can trigger common law payoffs, Law Times, Vol. 22, No. 40 (February 13, 2012)

Layoffs can trigger common law payoffs, Law Times, Vol. 22, No. 40 (February 13, 2012)

By Nikolay Y. Chsherbinin

Wrongful dismissals come in many forms, including temporary layoffs. In Elsegood v. Cambridge Spring Service (2001) Ltd., the Ontario Court of Appeal examined a novel legal issue of whether common law wrongful dismissal damages are available to employees whose dismissal was triggered by the operation of the Employment Standards Act due to the prolonged layoff. The court resolved that dismissed employees’ entitlements are not confined to remedies under the act and that common law concepts of reasonable notice would apply.

Layoffs are spells of employees’ temporary unemployment. At common law, employers have no right to lay employees off. Nor does the act give employers such a right; instead, it regulates the periods and effects of layoffs when the right exists. Absent an express or implied term in a contract of employment to the contrary, a unilateral layoff is a constructive dismissal that entitles employees to damages.

The Elsegood decision concerned a 48-year-old technician, Brian Elsegood, whose seven-year employment was terminated by a series of temporary layoffs that exceeded the statutory maximum of 35 weeks within a 52-week period. On April 4, 2009, Elsegood was laid off for the first time. Having recalled him on June 9, 2009, the company laid him off again on July 28, 2009.

After the cumulative length of his temporary layoffs reached the statutory maximum, Elsegood brought a claim for common law wrongful dismissal damages in the Small Claims Court rather than claiming termination pay under the act. The employer argued that common law damages were not available to Elsegood because his employment status at common law survived a statutory termination by the act.

The essence of the employer’s argument was that common law and the act are independent regimes. It maintained that the common law defines an employee’s actual employment status and the act operates only to entitle the employee to damages under it. On this premise, the employer unsuccessfully argued that common law damages for wrongful dismissal are available only for what would constitute a dismissal at common law and are not available for a deemed termination under the act. As a consequence, Elsegood received six months’ pay in lieu of reasonable notice together with legal costs.

In rejecting the employer’s argument that the act and common law operate as two independent regimes, the court noted that “statutes enacted by the legislature displace the common law.” This proposition seems to fly in the face of the act, which in s. 8 states that “no civil remedy of an employee against his or her employer is affected by this act.”

The court ultimately resolved that an employee’s status does not survive a statutory termination because the act operates to terminate employment in law, which includes common law, and not just under the statute.

The court also rejected the employer’s theory that an employee could be on a prolonged indefinite layoff but terminated for the purposes of the act as untenable because it offers no date specifying when a layoff would become a termination and thereby render the employer responsible for termination pay in lieu of notice. Referring to the terms of s. 56 of the act, which provides that the employee is terminated when a layoff reaches 35 weeks within a 52-week period, the court concluded that the legislature’s action leaves no room for the continued operation of the common law on that question.

Even if one accepts that common law continues to operate independently of the act, in the court’s view the common law would always allow an employee laid off for more than 35 weeks to claim constructive dismissal. This is consistent with s. 67(3) of the act, which entitles an employee to elect whether to receive termination pay or retain the right to recall.

In light of the Supreme Court of Canada’s reasoning in Machtinger v. HOJ Industries Ltd., a term in an employment contract that provides for a layoff exceeding 35 weeks without giving the employee the election available under s. 67(3) would be null and void because it would fail to comply with the minimum standard set out in the act.

At the same time, unclear language in the act continues to mislead employers that it confers on them the power to temporarily lay employees off. The controversy stems from the language in s. 54 of the act that appears to recognize, within the very definition of the termination, the legal right to lay off: “No employer shall terminate the employment of an employee . . . unless the employer has given the employee written notice of termination.”

A complicated mechanism set out in s. 56 of the act compounds the controversy through statutory qualifiers to control the metamorphosis from a layoff to a dismissal.

However, a number of decisions have confirmed that reliance on the temporary layoff provisions of the act is only relevant where the right to lay off exists in the employment relationship.

Given that a layoff is a contractual device, corporate counsel and human resources managers should be aware that the courts would recognize employers’ right to lay employees off when doing so forms an integral part of their employment contracts or they somehow acquiesced to it.

Contractually unauthorized or authorized but prolonged layoffs are wrongful dismissals because the continued attendance of employees at the place of work for pay is an essential term of their employment contracts.

It is irrelevant that an employer mistakenly or unintentionally repudiated the contract of employment as a fundamental breach occurs as a matter of fact.

In light of the Elsegood decision, employers and employees should beware of the following:

Practical Considerations:

  1. An employment contract is terminated under both the act and common law whenever a layoff triggers a dismissal under the statute.
  2. Prolonged layoffs can lead to significant common law damages.
  3. Employers should vigilantly monitor the duration of layoffs in order to avoid wrongful dismissal claims.
  4. Employers that use the word layoff as a synonym for termination, having no intention whatsoever of recalling employees when business conditions improve, expose themselves to substantial common law damages.
  5. Prudent employers should reference the possibility of layoffs in company personnel manuals, a move that could save them money at times when their financial needs are greatest.

Overall, however, there appears to be a need to reform the act in order to clarify the language dealing with employers’ statutory right to lay employees off.

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