The potential hidden costs behind temporary layoffs

Small businesses contemplating a temporary layoff of workers should consult with an expert before making a mistake that could cost them more than the savings of laying someone off.

Doug MacLeodAs a new year begins and employers brace for what the economy might deliver such as softer sales, cost cutting efforts such as terminations, reduced work week with employment insurance buffer, or layoffs may be on the agenda if they think it’s a short-term blip.

But one employment lawyer says employers should consult with someone other than the Ministry of Labour before making any quick decisions. Doug MacLeod of MacLeod Law Firm in Toronto says that while under Ontario’s Employment Standards Act employers can temporarily lay someone off for 13 weeks without any notice of termination or obligation to the employee, what the ministry may not say is that a temporary layoff could result in a wrongful dismissal under common law.

MacLeod has received calls from employers who have temporarily laid off employees who then received a letter from a lawyer claiming the laid-off employee has been wrongfully dismissed. After reviewing the situation, the employer is often advised that the employee has likely been wrongfully dismissed.

“For example, let’s say it’s a 20-year employee who is a foreman with four direct reports — that person could be entitled to 18 to 21 months notice,” says MacLeod.

One of the best ways to avoid the problem, says MacLeod, is to cover off the possibility of temporary layoffs by including it in an employment contract. By reserving the right to temporarily lay off an employee in an employment contract, an employer can avoid the common law obligation to provide reasonable notice. As long as the contractual provision complies with the Employment Standards Act, it is generally enforceable.

“The employment contract is the best kept secret in this area of law,” says MacLeod. “If you’re in a cyclical business that is not construction, or you have a small business and you have a blip in sales or you’re in the automotive sector and you have to let people go all of a sudden, if you’re in that kind of environment you need to anticipate layoffs may be needed.”

In an employment contract, employers can outline in advance what will happen if temporary layoffs are required.

“At least both parties know what they are getting into from the beginning,” says MacLeod, adding he has been advising employers to include temporary layoff language in all employment contracts, especially since 2008 when the economy first turned downward.

“I wouldn’t say it’s the norm, but if you’re a small business employer and you need to turn on a dime this allows you to do that in the short term, without having to worry about paying a 20-year employee 18 months pay, which might bankrupt you,” he says. “That’s what happens — an employer looking to save costs for two or three months ends up owing someone a year-and-a-half in pay.”

Also, under the Employment Standards Act, a temporary layoff can also be extended up to 35 weeks of the year. So while some employees might be able to make do for a month or two by collecting employment insurance or getting a part-time job, an extension of the layoff could force them to make other choices.

“Most people can’t afford to stay unemployed for that long — 13 weeks is one thing but 35 weeks is quite another, so what happens is they quit and get another job,” says MacLeod. “It’s not as simple as it seems — there’s a lot going on on both sides.”

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