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Legal-proofing labour law in recessionary times

|Written By Judy van Rhijn

In recessionary times employers look to save costs by reducing labour costs, and those times have come to Canada. All across the country, labour lawyers are seeing an upswing in activity indicating a downturn in fortunes. Ron Pink, managing partner of Pink Larkin in Halifax, has noticed a large increase in cold calls from individual employers since January and calls the slowdown “profound.” André Nowakowski, a labour lawyer at Miller Thomson LLP in Toronto, has seen activity picking up since last fall. “It doesn’t matter what size the employer, we are seeing it everywhere. It’s a painful process for everyone.”

Duncan McPhail, the managing partner of Roper Greyell LLP in Vancouver, says in recent months, he’s been seeing not just downsizing through layoffs and terminations, but attempts to reduce the costs of doing business by introducing new efficiencies so businesses can weather the economic storm.

Lawyers who specialize in this area give grave warnings about lawyers without labour and employment experience “dabbling” without getting specialist advice. “If clients are restructuring for reasons of cost, you need to get advice from people who are practising in the area all the time,” stresses McPhail. “You need a plan that’s going to work. There is a risk of going offside of the law.” Referral to a specialist is also recommended when calculating the anticipated cost of severance that a company will have to bear. “You can’t do that to the nickel but you can provide a ballpark range.”

Nowakowski says when advising a client going through hard times, plenty comes into play when pinpointing trouble spots. “Federally the Canada Labour Code and provincially the employment standards acts, the common law in a non-unionized environment, and the collective agreement in a unionized environment. These three things set out the general rules.”

McPhail agrees. “When you are about to embark on a plan that has an impact on the workforce, you tread on a whole raft of different labour rules, principles, and laws. The client who is about to embark on such a plan needs to know up front what rules and laws apply, the costs of the rules to the plan, and what they can and cannot do. For example, an employer can’t unilaterally change wages and terms of conditions of employment, such as reduce salaries by half, unless the employees agree. They can elect to consider themselves constructively dismissed, which makes them entitled to severance. There’s a whole body of law that determines what that will be.”

Nowakowski says another high-risk action is terminating 50 or more employees in four weeks. “This triggers the mass-termination provisions of the [Employment Standards Act], requiring notice to the minister [of Labour] and bringing into play notice of termination liabilities. In Ontario, there is normally an automatic right to eight weeks notice of termination. If you dismiss between 200 and 499 employees it increases to 12 weeks, and for greater than 500 dismissals there are 16 weeks of notice owing. If you don’t give working notice they get pay in lieu, which can be very significant.”

While ramifications in employment standards acts are substantial, the common law requirements for reasonable notice can be significant too. “For example, a five-year employee might be entitled under ESA to five weeks notice and five weeks severance,” says Nowakowski. “The common law might say 20 weeks, which would be inclusive of the ESA standard.”

If there is a collective agreement, the union must get notice before closure of operations. “There are potential liabilities if inadequate notice is given,” warns Nowakowski. Then there are seniority bumping rights, severance rights, recall rights, and collective bargaining issues to which they are contractually bound. “Employers are running a big risk if they are not considering all these items.”

After calculating all that, employers still have to look at severance pay, which is separate from termination under the ESA. “Severance pay is owing to someone who has worked for the employer for five years or more,” explains Nowakowski. “If you have an annual payroll of $2.5 million or more, or 50 workers have gone out the door in a six-month period, a maximum of 26 weeks could be owed.”

All of this calls for a lot of strategizing with clients before they take any steps. “They must go in with their eyes open,” says McPhail. “The most difficult cases are where people have already done the downsizing or reorganization, or changed terms and conditions, and problems and difficulties are arising. You protect them as best you can when it turns adversarial.”

Nowakowski says his firm sees all kinds of scenarios. “Lots of clients are proactive, but often it all needs to happen in a hurry and the landscape is changing so quickly. You only have to follow what’s happening to the Big Three automakers. We do spend some time putting out fires. For example, if you said today to 75 employees, ‘sorry, there’s no more work,’ the termination is effective today and nothing can be fixed.”

If clients do come in beforehand, lawyers can help turn their minds to due diligence, and help them ask the right questions. “You have to take a hard look at all the strategies,” says Nowakowski. “It may be possible to stagger terminations so that you never have more than 50 leave in the four-week period. A lawyer needs a good grasp of the operational requirements so he or she can make the plan cost as little as possible.”

McPhail suggests employers can make use of Employment Insurance if they instigate a work-sharing program. “You could change a four-day week to a three-day week, reducing everyone’s hours across the board, with the assistance of Employment Insurance to help augment people’s pay. It’s an option but you must know the limits to it so as to avoid the pitfalls of falling afoul of the rules.”

Another tool employers can use is layoffs, which are recognized by collective agreements. Under the Ontario ESA, employers retain recall rights for 13 weeks in a 20-consecutive-week period, or 35 weeks in a 52-week period. Nowakowski calls this a tough tool because once you go over 13 weeks, the ESA deems a termination to have occurred on the first day of the layoff. While a layoff is unpaid, termination brings pay in lieu of notice. Also, if layoffs are not part of the employment contract or the practice of the employer (i.e. an express or implied term), an unpaid layoff can be construed as a constructive dismissal. “Whether you use it depends on what is forecast in terms of business recovery,” he says. “It has to be looked at carefully so some inadvertent result cannot occur.”

Salary freezes or cuts are another strategy but can be a problem depending on the size of the reduction in wages and/or benefits. “If the reduction is large enough, it can trigger constructive dismissal by unilaterally altering a fundamental term of the contract,” states Nowakowski. “One would think some workers might accept it to keep their job, but you never know what an employee’s reaction will be. Getting the agreement of the employees to take a reduction in their compensation package is the best way if you can do it.”

If none of these strategies are available or effective, and the employer resorts to termination, Eric Harris, a partner at Harris and Co. LLP in Vancouver, says lawyers need to understand the motivation and effect of the termination. “What we’re experiencing at the moment is employees being terminated for many reasons. In most cases employers are responding to a business issue, but in some cases they are terminating people who have been ill a great deal or not performing well, using this opportunity to deal with those issues. In some cases it is not a typical termination and may engage human rights legislation and result in punitive damages.”

McPhail adds that some terminations may amount to early retirement. “In B.C., we have recently seen mandatory retirement removed, and employers may not be aware of the implications.”

Even more considerations are relevant when corporate staff are affected, either through changes following the sale of the business or mergers and acquisitions, or through terminations. Intellectual property must be protected if the company is still carrying on as an entity.

McPhail says that corporate departures should be part and parcel of the same economic plan as for other staff but that the rights of the employer and senior executives after they’ve left must be spelled out, in particular with respect to stock options, severance, and confidentiality. “If you send off into a competitive world the person who was in charge of your research and development, you need to examine any contractual obligations spelled out in non-solicitation and non-compete clauses. You need to ask what do those clauses do for the employer and how far will they be enforced. If there is no clause, you should ask what fiduciary rights might exist.”

Harris acknowledges the added complexity of the situation when departing individuals have significant knowledge of the business, customers, and know-how. “The courts have recently been very careful to balance the rights of the employer and interests of the employees. Some employees might think they have very strong restrictive covenants in place and undertake terminations believing the employee can’t work for a competitive employer. They realize after the fact that they can in some circumstances.

“The covenants may be too expansive in terms of geographic reach or too broad in defining what a competitor would be, or too long. Many have been shortened up in geographic reach and time.”

When the sale of the business is involved, Pink says good counsel could assist an employer by legalproofing against successful lawsuits. “Successorship, transfer issues, benefits, and pension plans all need to be dealt with. Employers need to develop policies that are fair to departing employees.” He also stresses it is important to be familiar with benefits and pensions in this climate and cautious when dismissing a large proportion of workforce. “Problems of pension funding could trigger the potential windup of the pension plan. Similarly, if you sack the young people and get too many old people, you could strike problems as well.”

Harris notes: “Employers need to be very clear of rights under pension plans and stock options if it is a public company. If documentation isn’t clear, employees may keep the options, bonuses, and other entitlements they would have kept if they had remained at work.” Similarly, employer contributions to the defined-benefit pension plan for medical, dental, long-term and short-term disability benefits, and travel insurance may have to continue for the entire ESA notice period, even if the termination is effective immediately.

As Pink says: “Good employers have done the planning before they start the process” and lawyers can make that happen.