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McLean v. Rawal Limited: A Temporary Layoff of Nonunion Employees Is Probably a Constructive Dismissal

The recent decision of our friend Justice Kevin Whitaker (ex Chair of the Ontario Labour Relations Board) in McLean v. Rawal Limited provides is a nice review for my Employment Law students, who write their midterm next week.  It deals with a number of issues we have covered, including:

  1. How can an Employer amend an employment contract?
  2. What is ‘new consideration’ in the context of an amendment of an employment contract?
  3. Is a temporary layoff a breach of the employment contract and a constructive dismissal?
  4. What is the legal effect of an Employee Handbook?

Basic Facts

At the time the employee was hired in 1998, there was an employee handbook that included a right of the employer to layoff. However, the employee wasn’t provided a copy of the handbook or told that the handbook formed part of her contract.  Then, in 2008, the employee was transferred from Job A to Job B, which was a lateral move.  She was told to sign a written contract at that point, and that contract indicated that she agreed that she had read and would follow the policies in the handbook.  The handbook contained provisions governing layoffs.

In October 2010, the employee was laid off and given a recall date of June 27, 2011.  During the layoff, she continued to be covered for benefits. In May, 2011, she was recalled to work, but chose not to return.  She sued and claimed she was dismissed.  The employer argued she was lawfully laid off on a temporary basis, and then quit rather than be recalled.

Legal Issue:

Is a temporary layoff of an employee a fundamental breach of the employment contract entitling the employee to quit and claim wrongful dismissal damages (“reasonable notice”)?

Analysis and Decision:

Justice Whitaker opened by noting a now familiar legal principle:

The parties agree that a layoff will be lawful and of effect where it is based on an employment contract. In the absence of a contractual basis for layoff, the device of layoff does not exist at common law and any purported layoff will be in fact, a dismissal.

This is a point of law that many of my HR students find very surprising.  ”We lay off people all the time!”, is a familiar retort I hear, even when the contract does not expressly give the employer that right.

The original contract (entered into in 1998) said nothing about layoffs, and the handbook was not part of that contract, since it was not referred to or even provided to the employee.  The only question then was whether the introduction of the new written contract in 2008, which did purport to incorporate the layoff language from the handbook, is enforceable.

Whitaker finds it is not, for another now familiar reason:  the employee received no ‘new consideration’ in exchange for signing the 2008 contract. An employment contract can not be amended without both sides receiving some new benefit in exchange.

What new benefit did the employee receive in 2008? The employer said she received “continued employment” and (I think) the continuation of benefits during the period of her layoff.  The first claim is a non-starter:  an offer of continued employment is not new consideration, as Whitaker explains:

[22] This issue has been dealt with by the Ontario Court of Appeal in Hobbs v. TDI Canada Ltd. 2004 CanLII 44783 (ON CA), where the court had before it the same question. At paragraphs 32 and 33, the Court noted that the leading authority on the point was Francis v. Canadian Imperial Bank of Commerce (1994), 21 O.R. (3d) 75 (C.A.) and that this case stood for the proposition that continuing employment cannot amount to consideration in exchange for a change in the terms of employment.

The Ontario Court of Appeal affirmed this conclusion as well in Braiden v. La-Z-Boy, a decision I described earlier.

Nor was the continuation of benefits during the layoff “new consideration”, according to Whitaker:

I do not consider the continuation of the benefits plan as consideration or an acceptance of the layoff. Employers may continue benefits after dismissal for a variety of reasons.

Although Whitaker doesn’t note this, the continuation of benefits after the layoff was also required by the contract, so it was not a ‘new’ benefit to the employee or acceptance of a temporary layoff. An employer is required to continue paying contractual benefits during the period of notice of termination, since an employee is entitled to receive whatever she would have received in pay and benefits had proper notice been provided. For a 12 year employee, the notice period was going to be somewhere around 8-12 months (Whitaker sets it at 10 months). Therefore, the contract required the employer to continue benefits after the layoff for at least 10 months.  Thus, continuing benefits coverage was not some new benefit to the employee; it was a requirement of the contract.  Complying with preexisting contract terms cannot be “new consideration”.

I’m informed that an appeal from this decision is in the works.  I can’t see on what basis.  Waste of money, if you ask me. What do you think?  Did Whitaker make an error in his reasoning in this case?

For students and HR folks, what should the employer have done here to avoid the temporary layoff being ruled a breach of contract and a dismissal?



2 Responses to McLean v. Rawal Limited: A Temporary Layoff of Nonunion Employees Is Probably a Constructive Dismissal

  1. Dennis Buchanan Reply

    February 10, 2012 at 2:38 pm

    I looked at this case a few weeks ago. It mostly makes sense to me. But a waste of money? Maybe not. We (or at least, I) don’t know everything in the record on the consideration point. Justice Whitaker’s word choice at para 25 suggests that the compensation package was perhaps not identical, maybe with contingent benefits or bonuses. The job duties were certainly different, and I’m not aware of any case law dealing head on with the question of whether a lateral transfer can constitute consideration.

    Also, when I came across this case before I wondered about the mitigation analysis. The conclusion regarding non-acceptance of the job offer at the golf tournament is defensible (inconsistent with Evans v. Teamsters, but probably distinguishable), but what about rejecting the recall notice? Any insight?

    • Doorey Reply

      February 10, 2012 at 6:08 pm

      Hi Dennis, fair enough, if there are facts not recited in the decision that are relevant, then that could change the analysis. That is always the case. So perhaps my “waste of money” comment is a little harsh. We will have to wait and see. The recall came 7 months into a 10 month period of reasonable notice. If as a result of Evans, a dismissed employee must accept a recall 70% of the way through the notice period, then that is just another example of how impractical Evans is when applied to the real world. Applying that analysis, the employee would need to return to a job she doesn’t want for 3 more months and then quit again, or just forfeit the final three months of her notice period and walk away. And of course neither the employee nor the employer will actually know at the time she has to make the decision how long the notice period is. So she is supposed to return to work, take a guess about how long the notice period is, and then quit when she thinks it up. Then she applies for EI, and would get denied if the employer says she quit, which would not be an unreasonable position for the employer to take in the circumstances. This is why I suggested a while back that this area of the law has become some obscure that it has lost touch with common sense. Once your average employer or employee can make no sense of legal rules, then perhaps it is time for some simplification and clarification.

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