When can an employee be laid off? Wrongful Dismissal, Frustration of Contract, and COVID-19
"Notwithstanding that the ESA has provisions for temporary layoffs, in the normal course an employee can sue for constructive dismissal if their contract does not allow for it, and the employer unilaterally lays the employee off. The Doctrine of Frustration serves to counterbalance these wrongful dismissal suits in certain circumstances."
During this COVID-19 pandemic, many Ontario employers are struggling with a lack of cash flow and are left wondering whether they can lay off their employees either permanently or temporarily until this crisis is resolved. There are many articles circulating amongst human resource specialists and other lawyers that say, “employees who are temporarily laid off are entitled to full wrongful dismissal damages.” Others are just looking at the Employment Standards Act ("ESA") and concluding business can temporarily layoff employees.
It is not that simple, especially in these unprecedented times. Many of these articles do not consider the common law doctrine of contract frustration. Everyone seems focused on either the employment contract, or provisions of the Employment Standards Act (“ESA”), but neglect to consider the common law. Depending on your business, the employer may be able to rely on frustration to terminate or lay off employees without paying notice and severance.
(NOTE: This article does not apply to unionized workplaces. This article will focus on employment in the non-union context.)
Can an employee be laid off?
First, check the employment contract
Always start with the contract. Employers and employees are free to enter into their own agreement (aka “Employment Contract”) that outlines their mutual expectations over the course of employment. These contracts typically cover things such as how much notice the employer must give the employee if the employee is being terminated. Consequently, the employer (or the employer’s lawyer) may have had the foresight to include a layoff provision in the employment contract. If so, the employer may be able to rely on that clause now to layoff the employee for a period of time proscribed by the contract or the Employment Standards Act (whichever is more).
However, the vast majority of businesses in Ontario do not have an employment contract in place or, if they do, it is silent on layoff provisions. If no written contract exists, many of the minimum standards outlined in the Employment Standards Act will apply. Note that the Court may impose a contract, even if one is not written. Depending on the circumstances, the Court may find that there was an “implied” contract based on the employer and employee’s conduct.
If there is no employment contract or if the contract does not address layoff, can an employer layoff an employee?
There are a lot of simplistic opinions floating around regarding the Employment Standards Act, and whether it allows an employer to temporarily lay off an employee. These opinions typically refer to Section 56(1) and (2) of the ESA, which states, essentially, that an employer may temporarily lay-off an employee if it is less than 13 weeks within a period of 20 consecutive weeks, or 35 weeks in any period of 52 weeks. Some articles therefore argue that "the ESA says you can, so go ahead and temporarily lay your employees off."
The caselaw does not support this position. In Elsegood v Cambridge Spring Service, 2001 Ltd., 2011 ONCA 831, the Ontario Court of Appeal clearly held that “An employer has no right to impose a layoff either by statute or common law, unless that right is specifically agreed upon in the contract of employment. The fact that a layoff may be conducted in accordance with the Employment Standards Act is irrelevant to the question of whether it is constructive dismissal.” This was also more cited recently in Bevilacqua v Gracious Living Corp, 2016 ONSC 4127.
In Potter v New Brunswick (Legal Aid Services Commission), 2015 SCC 10, the Supreme Court of Canada clarified the test for constructive dismissal: “When an employer’s conduct evinces [shows] an intention to no longer to be bound by the employment contract, the employee has the choice of either accepting that conduct or changes made by the employer, or treating the conduct or changes as a repudiation of the contract by the employer and sue for wrongful dismissal.”
In other words, notwithstanding that the ESA has provisions for temporary layoffs, in the normal course an employee can sue for constructive dismissal if their contract does not allow for it, and the employer unilaterally lays the employee off.
But, given the exceptional nature of COVID-19, this “normal rule” may be affected by the doctrine of frustration.
What is the doctrine of Frustration?
The legal doctrine of frustration applies in exceptional circumstances where a situation arises that:
Makes further performance of the contract “radically different from what the parties agreed to”
That cannot be considered the fault of either party;
That was not foreseeable by the parties when they entered into their employment arrangement; and
Is therefore not adequately anticipated by the contract.
Here’s how the Supreme Court puts it: “Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’” The Court will decide whether it can “relieve the parties of their bargain because a supervening event has occurred without the fault of either party.” Naylor Group Inc. v Ellis-Done Construction Ltd., 2001 SCC 58.
The Court has also posed the question this way: “If the contracting parties, as reasonable people, had contemplated the supervening event at the time [they entered into the employer-employee relationship], would they have agreed that the supervening event would put the contract to an end?” (see Naylor Group).
Frustration can apply in many different contexts, including:
Disasters, like fire destroying a business
Employee illness or injury
Supervening Illegality (discussed in further detail below).
Supervening Illegality and COVID-19: Ontario’s State of Emergency may frustrate the employment contract
Supervening Illegality is one example of frustration, which occurs when a legislative change outside the agreement of the parties makes further performance of the agreement illegal. In this case, employers may say that the employment contract is frustrated by a “supervening illegality.”
One example of this is found in Cowie v Great Blue Heron Charity Casino, 2011 ONSC 6357 (Ont. Div. Ct.). In that case, a new law requiring security guards to have clean criminal records frustrated employment between a security guard and his employer when the employee was found to have had a prior criminal offence.
On March 17, 2020 the Ontario Government made an order declaring a State of Emergency under s. 7.0.1(1) of the Emergency Management and Civil Protection Act. As a result of that order, certain businesses were “legally required to close immediately.” This included private schools, licensed child care centres, bars, some restaurants, theatres, concert venues, etc.
That emergency order made it impossible for those businesses ordered close to continue operating legally. Consequently, they may be able to claim their employment contracts are frustrated by a supervening illegality, because continuing to operate would result in illegal activity.
However, employers should note that a new section (50.1) was added to the ESA that grants employees the right to a “leave of absence without pay” to those businesses that were ordered closed because of the State of Emergency orders. Consequently, there is uncertainty how frustration would apply in the face of this statutory amendment. See our other Article to learn more about recent amendments to the ESA.
Frustration also contemplated by the ESA
Even if a business is not ordered closed by the emergency order, the employer may still be able to claim frustration as a result of COVID-19. In fact, the ESA explicitly contemplates this.
Section 55 of the ESA states: “Prescribed employees are not entitled to notice of termination or termination pay.” Section 2(1) of O.Reg. 288/01 outlines what constitutes a “prescribed employee”. Section 4 of that regulation deals with frustration:
“An employee whose contract of employment has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance.”
Moreover, s. 9(1) of the O.Reg. 288/01 has a similar provision for severance pay.
Consequently, an employer may be able to claim it does not owe notice or severance to an employee if the contract of employment has become impossible to perform by a fortuitous or unforeseeable event or circumstance.
In the normal course, an employer has no right to layoff an employee unless it is written in the employment contract. If the employer does so, it may be liable for damages for wrongful dismissal. This applies regardless of provisions in the ESA allowing for temporary layoffs;
However, if an employment arrangement is frustrated, the court will treat the employment agreement as being severed – both parties are relieved of their obligations;
Depending on the industry and how COVID-19 has affected your business, your employment contract may be frustrated, in which case the employee is not entitled to notice or severance;
A brand new section added to the ESA entitles employees to take an unpaid leave of absence for reasons related to COVID-19. This means an employer cannot terminate the employee if they fall into any of the criteria. Refer to this article for more information.
How the Courts will treat the doctrine of frustration in light of the new additions to the ESA is a novel issue and is uncertain.
Consequently, given the unprecedented effect of COVID-19 on businesses, an employer may be able to claim the employer-employee contract is frustrated, and is relieved from providing notice and severance.
Give us a call to get advice on how frustration and the ESA applies to you.
DISCLAIMER: This is not legal advice. This post is meant to provide general information on the ESA and the doctrine of frustration. The law is necessarily contextual, and depends entirely on your individual circumstances. An analysis of all contextual factors relating to your employment contracts, and the effect of COVID-19 on your business is absolutely necessary before a conclusion can be reached as to whether your employment contract is frustrated.