Employers take note: a weaker economy does not only increase job insecurity. It also increases the legal and financial risk for employers looking to reduce headcount. During an economic downturn, cost savings achieved through layoffs are often offset by increased legal exposure, according to employment lawyers Howard Levitt and Jenny Yu.
Why Terminations Become More Expensive
When the job market is strong, employees tend to leave quietly when let go. They quickly find another offer, move on, and litigation remains more of a theoretical threat. But when the market weakens, the equation changes. There are three key reasons for this shift, which employers often underestimate.
1. Employees Are Far More Likely to Sue When Jobs Are Scarce
In a robust labour market, a terminated employee receiving a modest severance package may decide litigation is not worth the time, cost, or stress. In some cases, they secure new employment before the severance period even expires. However, in a weak job market, the calculation changes. When comparable employment is difficult to secure, employees have a strong incentive to pursue their full legal entitlements, especially those with long service, senior roles, or significant compensation. Without a properly drafted employment agreement limiting liability, Canadian courts may award common-law notice periods up to 30 months. This represents a material balance-sheet risk. Employers should expect more demand letters, litigation, and aggressive legal positioning from terminated employees in a downturn.
2. Economic Weakness Tends to Increase Notice Periods
Where no enforceable termination clause limits entitlements, courts determine reasonable notice based on factors such as age, length of service, position, and the availability of comparable employment. The last factor is where the economy enters the courtroom. Judges are not blind to labour market conditions. In recessions or sector-wide contractions, courts extend notice periods because re-employment takes longer. This dynamic was observed during the COVID-19 downturn and after the Great Recession. Even a modest extension of one or two additional months per employee multiplies quickly across a workforce reduction, making cost-cutting more expensive than anticipated.
3. Mitigation Is No Longer a Reliable Safety Valve
Dismissed employees have a legal duty to mitigate damages by seeking comparable employment, with any income earned during the notice period deducted from damages owed. However, in a weak economy, finding a comparable job becomes much harder. Employees may take longer to secure new work or accept lower-paying positions, reducing the mitigation effect. This increases the employer's ultimate payout. Employers should not rely on mitigation as a cost-saving measure during downturns.
In summary, a weaker economy amplifies legal risks and costs for employers conducting layoffs. Proactive steps, such as reviewing employment contracts and ensuring proper documentation, can help mitigate these risks.
