COVID-19, Layoffs, and Employment Standards: An Introduction

Written by David Doorey, York University

There has been a lot written lately on how COVID-19 interacts with the laws that govern work and employment, much of it quite complex because the issues are complex.  In this post, I want to go back to basics and review for employment law students (and anyone else interested) some fundamental points about employment standards legislation and the law of employment contracts as it applies to layoffs that might occur as a result of COVID-19.

Employment Standards Legislation Governs “Employment” Contracts

A first thing to remember is that employment standards (ES) legislation regulates “employment contracts”.  That might seem like an obvious point, but it needs to be emphasized because so many workers today perform work under relationships that might not be characterized as “employment” at all.  If the worker is a true “independent contractor”, for example, then ES legislation does not apply.  There are complex tests applied to determine if someone is an “employee” or an “independent contractor” and the fact that a contract describes someone as an “independent contractor” is not dispositive.  The tribunal will look at all of the circumstances of the work and decide if the worker more closely resembles an employee or an entrepreneur.  But if the worker is not an employee, then none of the entitlements and obligations in ES legislation apply.

Employment Standards Legislation Restricts Freedom of Contract

A second important point to understand about ES legislation is that it functions by restricting freedom of contract.  While it is possible for the parties to an employment contract to agree to terms and conditions that are better for the employee than what is required in ES legislation, they cannot agree to terms that provide less benefit or protection than required by the legislation.  This is made clear for example in section 5 of the Ontario ESAand similar provisions are found in ES legislation across Canada.

There can interesting debates about whether a contract provides a “greater benefit”, but the key point to understand is that an employer and employee cannot agree to something that is contrary to the ES legislation. For example, if an employee is being paid $10 per hour when the ES legislation includes a $14 per hour minimum wage, then the employer is violating the law.  It is no defence for the employer to say, “but the employee agreed to $10 per hour”.  Similarly, an employee cannot agree to waive the “notice of termination” or other protective provisions in the ES legislation.

Temporary Layoffs in the Common Law & Employment Standards Legislation

Now things get trickier. Thousands of employees in Canada, if not millions, may soon find that their employers have no work for them because the companies have been ordered to shut down or there is not enough work to keep the company operating.  Hopefully for most of these workers the layoff is temporary and not permanent.  The question many workers have is whether there are any legal protections or financial entitlements for employees who are laid off.  

Here we need to pause to recognize that there are three overlapping but distinct legal regimes that regulate employment and each regime may have something to say about this question.   See Figure 1.1., which is lifted from Chapter 1 of my Law of Work book.

Let’s first put the collective bargaining regime to one side: if you are a unionized employee, your collective agreement may describe what happens in the case of a layoff and so you should start there and with your union representatives who can answer your questions.  In this post, I want to focus on non-union employees who are governed by both employment standards legislation and the common law of the employment contract. [Note that I’m mostly leaving aside other statutes that also come into play in the case of COVID-19, including human rights and OHS legislation]. 

1. The Common Law

The common law involves the rules of contract interpretation judges apply when interpreting and enforcing employment contracts. If there is any obligation for the employer to pay an employee during a layoff it would need to be found in the contract.  There may be contractual entitlements to sick pay if an employee contracts COVID-19. You would need to look at the contract to see what benefits exist. An important point about the common law is that judges rarely reinstate employees to their jobs, even if the reason for the termination was unlawful. Terminated employees who sue their employers are usually fighting about damages (lost wages and benefits), not reinstatement.

In the common law, a temporary layoff is usually considered to be a serious breach of contract that the employee can opt to treat as terminating the contract (a constructive dismissal, as explained by lawyer Devan Marr in this post on CLWF), unless there is an expressed or implied term in the contract permitting a temporary layoff.  This is because a layoff involves the employer saying, essentially, “you aren’t permitted to come to work for a while” when “coming to work” is the basis of the contract.  It’s an interesting question whether a court would “imply” a contract term permitting layoffs as a response to loss of work caused by a pandemic. Reasonable lawyers could disagree on the answer. 

I think it is safe to assume that a constructive dismissal would not result from a layoff caused by a government order for the employer to temporarily close.  But if a layoff results from a downturn in business (a lack of work), and there is no expressed or implied contract term permitting the employer to temporarily layoff an employee, then a laid off employee who is prepared to give up their job could quit and file a lawsuit alleging that the layoff constitutes a termination (a constructive dismissal). The damages the employee would be seeking would be lost wages and benefits for the period of notice of termination required by the contract.  That notice period is either expressed in the contract or, if not, it is whatever a judge decides is “reasonable notice”.   

The risk of filing a constructive dismissal lawsuit is that you are forfeiting your right to be recalled if business picks up, and there is also a chance that you could lose the case if the judge either: (1) implies a term permitting temporary layoffs arising from complications due to an international pandemic; or (2) finds that the employment contract has become “frustrated” as a result of the pandemic putting the company out of business. Frustration is a legal doctrine that essentially treats a contract as coming to an end through the fault of neither party due to an event that renders it impossible for the contract to be performed. The classic example is an “Act of God” destroying a workplace. If frustration occurs, both parties are relieved of any obligations under the contract, including the obligation to provide notice of termination. Again, reasonable lawyers could disagree about whether a court would apply frustration to the various circumstances that might arise owing to a loss of work or a business failing related to COVID-19.  

An employee who loses a constructive dismissal lawsuit is treated as having quit, which can disqualify the employee from unemployment insurance, the possibility of termination pay, and from the federal government’s new Emergency Response Fund, so employees considering making an argument that they have been constructively dismissed should speak to an employment lawyer first.

Temporary Layoffs and Employment Standards Legislation

ES legislation also requires employers to provide employees with notice of termination.  Compared to the amount of notice courts imply as “reasonable notice” in the common law regime, “statutory notice of termination” is quite short. For example, in Ontario the amount of notice required by the ESA maxes out at 8 weeks for employees with 8 or more years’ of service (unless 50 or more employees are terminated within a 4 week period, which triggers additional notice requirements up to 16 weeks).  In Ontario and the federal sector, there are additional requirements for “severance pay” for employees in some circumstances. “Reasonable notice” for a long-service employee in the common law regime can reach up to as much as two years.

However, the statutory requirements for notice of termination (or pay in lieu of notice, called “termination pay”) and severance pay are only triggered when there has been a “termination” of employment as that term is defined in the ES legislation. The legislation defines when a “temporary layoff” becomes a “termination”.  This gets confusing because although a temporary layoff may be treated as a constructive dismissal (i.e. a termination) in the law of contracts (see above), ES legislation permits a temporary layoff in some provinces (including Ontario) to take place for a while before the statutory requirement for the employer to provide termination and severance pay kicks in.  

For example, in Ontario, section 56 of the ESA includes a multi-pronged definition of when a temporary layoff becomes a termination, the easiest part of which is that a layoff is a termination when it lasts more than 13 weeks in any period of 20 weeks. That means once a layoff surpasses 13 weeks (without a recall in the interim), the requirement for the employer to give statutory notice and severance pay kicks in. So an employee who is laid off for a long period may eventually be entitled to termination (and possibly severance pay) under ES legislation.  

The takeaway is that if an employee is laid off during the COVID-19 epidemic, then for the purposes of ES legislation, they are not considered to be “terminated” at least for a while.  Their employment is interrupted. There is no present statutory requirement for the employer to pay the employee during a temporary layoff although some employers opt to do so. In most provinces at present there is also no ES entitlement to paid sick leave, although some provinces have indicated an intention to introduce some form of paid leave entitlement (nice summary here from Faskens).   An employee who is laid off during the COVID-19 epidemic may be entitled to use accrued vacation pay and can apply for unemployment insurance. 

There are entitlements to take unpaid sick leave if an employee contracts a virus ranging in length in ES legislation across Canada as well as various other leaves, such as leaves to care for sick family members.  Moreover, most provinces have now introduced some form of extended leave entitlement for workers affected by COVID-19. For example, in Ontario, a person who can’t work because of a COVID-19 related reason (including having to care for a family member or for children whose school has closed) is protected by a new extended leave provision.  Check your province for the scheme in place there.

The significance of statutory leaves is that they come accompanied by a right of the ES tribunals to reinstate employees terminated for taking the leave. This is important. An employee terminated for taking a leave that it is not authorized by statute might be entitled to termination pay, but the ES tribunal will not be empowered to order the employer to rehire the employee. 

Lastly, employment standards legislated has adopted many of the exemptions to the requirement for employers to provide notice of termination found in the common law, including when performance of a contract has become “frustrated by a fortuitous or unforeseeable event of circumstance”.  This opens the door to an argument by employers that there is no obligation to provide employees with statutory notice or severance pay when the termination was due to COVID-19 causing a workplace to close or even causing an extended layoff. Once again, reasonable lawyers could disagree over whether that exception would or should apply. The ability to make a frustration argument could be foreclosed by new legislation being drafted to protect workers during these very difficult times.

Updated on March 27 2020.

David Doorey, “COVID-19, Layoffs, and Employment Standards: An Introduction” Canadian Law of Work Forum (March 17 2020): http://lawofwork.ca/covid-19-layoffs-and-employment-standards-an-introduction/