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Workforce restructuring

Legal pitfalls abound when controlling costs through a restructured workforce
|Written By Glenn Kauth

If you work for the City of Toronto and you’re not in a union, you can likely forget about much of a pay increase this year. In April, city council considered whether to scrap planned raises for cost of living and performance for its non-unionized staff.

At the same time, politicians rejected proposals to freeze their own salaries while potential raises for the city’s unionized staff remain subject to ongoing negotiations.

“Certainly, non-unionized employees are not covered by the same benefit of a collective agreement, and as long as legislative requirements are met, council is free to do that,” says city solicitor Anna Kinastowski. Even at the best of times, the idea of public sector workers who enjoy enviable job security watching their salaries get frozen isn’t something that’s likely to spark protests at city hall.

But the spectre of employees seeing the terms of their jobs change suddenly raises legal questions, an issue an increasing number of businesses are grappling with as they try to cut labour costs.


“In 25 years of practice, this is the biggest deal I’ve seen,” says Dean Palmer, a partner in the labour and employment group at McCarthy Tétrault LLP in Toronto. “It’s the most dramatic situation I’ve seen in employment law in terms of closures, reductions, and downsizings, no question.”

While stories of layoffs have been making front-page headlines, Palmer notes many employers have been seeking to avoid cutting their workforce through alternative ways of reducing costs. “The legal people and the [human resources] people are trying to reframe the question to say, ‘Can we look at reducing our employment costs by 10 per cent as a more general statement?’”


As a result they’re considering options such as cutting salaries by 10 per cent. Such moves raise the prospect of constructive dismissal claims, but so far Palmer has been surprised to see “none, or very little, fallout in these particular cases. I’m not sure that that approach would have worked two years ago,” he says. “But I think employees . . . believe these are times like we’ve never seen before and they’re willing to pull together.”


Chrysler’s agreement with its Canadian labour force in late April was an example of reducing overall employee costs through alternative means. The deal between the third-largest North American-based auto company and the Canadian Auto Workers union left hourly wages intact, while cutting a range of benefits.


The package equates to a reduction of $240 million in annual labour costs through cutting annual Christmas bonuses and flexibility of work rules making it easier for the company to hire temporary workers. As part of the deal, Chrysler cut the third production shift at its minivan plant in Windsor, Ont. The goal of the agreement was to allow for the automaker to avoid bankruptcy.


Rachel Arbour, an associate practising in the pension and benefits group at Hicks Morley Hamilton Stewart Storie LLP in Toronto, says some of the “more creative measures” employers are considering to survive the downturn include four-day workweeks — with an accompanying cut in pay — and unpaid days off.


The trend is taking place across the country, with companies like Winnipeg’s Boeing Canada Technology introducing a work-share program for its staff to Hamilton, Ont.’s ArcelorMittal Dofasco, paying steel workers their full salaries while having them take vacation time on their added weekly day off. Even Nova Scotia underwear maker Stanfield’s Ltd. has had to cut work hours.


In Alberta, employment lawyer Andy Robertson says the days of employees having the upper hand are winding down. “We used to have crazy problems like the workers up in northern Alberta all wanting to go back to Newfoundland for Christmas as a crew,” says Robertson, the chairman of Macleod Dixon LLP’s employment practice group in Calgary.

“The reality is if they did just leave, they’d get their job[s] back anyway.” Now, oil-patch workers are finding even lucrative northern living allowances — extra pay usually aimed at compensating for the high cost and isolation of living in places like Fort McMurray — are no longer a guarantee.

As well, oil and gas companies are cutting back on benefits like car allowances and, because there’s less drilling activity, they are paying out less in daily bonuses for time workers spend away from home at well sites. “I’m obviously quite concerned about the far-reaching consequences of all these changes,” Robertson says, noting the cumulative effect of the cuts can add up to major decreases in take-home pay for workers.


Of course, such moves prompt the risk of constructive dismissal claims that the employer has unilaterally changed a fundamental term of the contract.

Normally, assessing how likely that is to happen involves balancing concerns over the company’s deteriorating performance and determining what concessions are reasonable to ask of employees. But while a key way to mitigate that risk is by giving employees up to two years’ notice of the change, Arbour finds employers are now less willing to do that given the need to cut costs quickly.


“[Announcing] it today and having it become effective tomorrow is not something that’s unheard of right now,” she says, noting the courts’ expectations of what is reasonable aren’t necessarily any different than they were a year ago.


“Truly, the legal risks have not changed. It’s what makes the most sense for the companies [that] may have changed, and their willingness to take on some of these legal risks in light of drastic changes in circumstances seems to be what has changed. I think that companies are trying to do what they see as the most prudent way of addressing their current financial circumstances.”


When it comes to avoiding constructive dismissal claims from salary cuts, Palmer says a general rule is that a reduction of 10 per cent or more could count as a fundamental change to the employment contract.

But, he points out, providing notice, seeking employee agreement to the change, and ensuring the reductions are across the board rather than targeting selected workers can help mitigate the legal implications. Including reductions to company executives’ wages also helps bring employees on side.


In most cases, Palmer says a majority of employers are taking what he calls a “measured risk,” including in a few cases where employees took 10-per-cent pay cuts. “I was nervous because I thought that was a bit aggressive but I was surprised that in the three instances there was actually no push back. It was a risk but it’s a risk that’s maybe manageable and worth taking and maybe better than just firing 10 per cent of the people.”


In the City of Toronto case, Kinastowski notes that the group representing workers affected by the salary restraint agreed to the move. “I might point out that there is an affiliation of non-union employees . . . and they’re supportive of the wage freeze,” she says.


But the executive director of that group, the City of Toronto Admin-istrative, Professional, Supervisory Association, Inc., points out that that’s not necessarily the case. In a recent letter to city council, Richard Majkot wrote that the association would accept a cost-of-living freeze only if the city’s unionized workers got the same deal.

As well, the letter argues that employees should at least get a one-time payment for meeting their performance objectives since any increase they get is based on their work from the previous year. City council has also come under criticism that politicians have rejected a salary freeze for themselves, instead electing to go ahead with a 2.42-per-cent raise.


In late April, the City of Toronto approved the freeze, but instead of all non-union employees having their merit increases cancelled, only ones who are at the top of their pay grade won’t get them. All employees aren’t getting their planned cost-of-living increases either.


Complicating the legal issues for employers, of course, is the question of whether the courts will take economic circumstances into account when assessing wrongful dismissal cases. Already, lawyers are taking note of two significant rulings in that area from last year.


In Evans v. Teamsters Local Union No. 31, the Supreme Court of Canada ruled that a fired worker, Donald Norman Evans, had a duty to mitigate his damages from losing his job by agreeing to the employer’s offer to keep working during the two-year notice period.

As a result, Evans lost in court, something Robertson says is a sign that employees will now have to think again about their duty to minimize their losses before filing a lawsuit.


In the second case, Wronko v. Western Inventory Service Ltd., the Court of Appeal of Ontario considered an employer’s bid to change a worker’s right to severance from two years to 30 weeks. The worker, Darrell Wronko, rejected the change and despite the fact the employer provided him with two years’ notice while Wronko continued on the job, the court ruled in favour of his claim for breach of contract.

Rather than relying simply on the passage of time, the judges held that the employer instead should have fired him with proper notice while offering him another contract on the new terms. For Arbour, the case is noteworthy since it puts a new spin on the notion that employers could change a term of employment as long as they gave proper notice.


Already, labour lawyers like Steve Levitt, an associate at Nelligan O’Brien Payne LLP in Ottawa, say they’ve been seeing more inquiries from fired workers curious about whether they have a legitimate claim for wrongful dismissal.

But while Levitt doesn’t expect the economic downturn will affect how judges assess such lawsuits, Palmer isn’t so sure, especially in cases that centre on claims that the firing was humiliating. “I suspect that the one thing that the courts are going to do is they’re going to be a little bit more forgiving of employers on these constructive dismissal issues,” he says.

“There are going to be cases where two years ago it would have been constructive dismissal, and maybe in two years when these cases hit the deck the same action is not going to be constructive dismissal.”


In the meantime, recessionary conditions have already sparked battles over labour issues in the courts, most notably in the case of Nortel Networks Corp. employees who claim they lost out on promised severance packages after they agreed to stay on with the company temporarily to help it manage the transition of their jobs to places like China, Mexico, and Ireland, says Robertson.

In Calgary, the dispute dates back to last May, when Nortel announced it was closing its local facility while it transferred work abroad. Then, in the fall, the company asked the workers to remain during the transition period in exchange for 60 days’ notice and then a severance payment.

But when Nortel announced it was filing for bankruptcy protection under the Companies’ Creditors Arrangement Act in January, those arrangements came to a halt, says Robertson.


“They’re all stiffed,” he says. “It’s appalling to me because it’s hard for me to believe that the company didn’t know it was in difficulty in December.”

Adding to the frustration is the fact some of the workers remain on “death row” with the company because they don’t want to lose their chance to get severance should they quit, says Robertson. Meanwhile, some of them turned down other job offers because of the company’s promises.

“The people who helped move their jobs offshore got suckered,” he argues. As a result, he is representing more than 100 Calgary workers in their bid for compensation. Levitt, too, has taken on the cases of employees in similar circumstances in Ottawa.

Also going to battle with Nortel are employees who claim they lost out on their 2008 bonuses as well as a promised transitional retirement allowance. In April, Levitt was in court in a bid to get a representation order for those workers during the CCAA proceedings.


Still, Robertson acknowledges the circumstances are difficult given the uncertainty plaguing the company. “Now they’re unsecured creditors claiming in the CCAA process in Toronto,” he says of the employees.

Across southern Ontario, too, workers at troubled auto-parts makers have found themselves in similar situations in which their companies closed or downsized without paying severance or, in some cases, their full pay.

As a result, the disputes have degenerated into union blockades, prompting companies to take the matters to court as they seek injunctions against the workers.


In the end, lawyers expect companies’ moves to cut costs will make labour and employment one of the few growth areas in the legal field as the recession drags on. While some employees will fight back with wrongful and constructive dismissal claims, Arbour predicts employers will be equally proactive in defending themselves.

“I assume that companies will look at the mitigation-of-loss efforts by the employee,” she says, adding that many employees are at least recognizing the upside of the salary cuts and freezes as well as the four-day workweeks. “In some ways there is a silver lining. It’s not the best silver lining but it at least means that there is a position there, and someone is working.”


Palmer, too, says there can be positives for employers even if a few workers go to court. “Maybe you’ve just found the 10 people you didn’t really want out of 100 people. Maybe you’ve reduced your head count by 10 per cent and you’ve actually picked the right people.” 

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