Headlines are becoming familiar again: layoffs at major employers, manufacturing retrenchment in Ontario, and trade uncertainty from the renegotiation of the Canada-United States-Mexico Agreement (CUSMA). For many Canadian businesses, this is not yet a crisis, but it is unmistakably a moment of caution. When caution turns to cost-cutting, layoffs are never far behind.
But layoffs, despite their frequent use, remain widely misunderstood. Both employers and employees often treat them as a simple pause in the employment relationship. In law, they are anything but.
What the Law Says About Temporary Layoffs
Under Ontario's Employment Standards Act (ESA), which is similar to legislation in most jurisdictions with slightly varying timetables, a layoff is only lawful if it is temporary. That sounds straightforward, but the statutory framework is not. In most cases, a temporary layoff cannot exceed 13 weeks in a 20-week period. There is an extended window — up to 35 weeks in a 52-week period — but only where the employer continues to provide meaningful compensation, such as benefits or partial wages.
Even then, the ESA answers only part of the question. It defines what is permitted, but it does not grant employers the right to impose layoffs in the first place. That distinction is where many organizations get into trouble.
Constructive Dismissal Risks
Absent an express contractual term or a well-established workplace practice accepted by the employee, a layoff amounts to a fundamental change in the employment relationship. In other words, it is a constructive dismissal from day one. The employee is entitled to treat the relationship as terminated and pursue severance that dramatically exceeds ESA minimums.
Employers frequently assume that because the ESA contemplates layoffs, they are free to use them as a tool. Courts have consistently said otherwise.
Further Legal Pitfalls
The risks do not end there. If a layoff exceeds the ESA's time limits, it is deemed a termination. If an employee is recalled but returned to a diminished role — say, a senior executive reassigned to a more junior position — the constructive dismissal issue simply arises later in the process. The employment relationship may continue on paper, but not in substance.
And yet, even where constructive dismissal is established, employees should not assume a windfall. Many employment agreements now attempt to limit severance to ESA minimums, even in cases of constructive dismissal. While such clauses are frequently litigated — and often struck down — they remain a significant factor in assessing risk. For example, if the termination clause does not specify that it deals with constructive dismissals, a court might find that constructive dismissals are not covered.
Practical Takeaways for Employers and Employees
Employers should review their employment contracts to ensure they include clear layoff provisions that comply with the ESA and common law. Without such provisions, a layoff may trigger constructive dismissal claims. Employees who are laid off without contractual authorization should seek legal advice promptly, as they may have a claim for severance far beyond statutory minimums.
In summary, layoffs are not a neutral holding pattern. They are a legal minefield that requires careful navigation.
