Covid-19 and Lay-Offs: What Does It Mean for Employment Contracts?

In the midst of the Covid-19 crisis many businesses are scaling back or shutting down completely. In a matter of two weeks in late March, 2020, approximately 1 million Canadians have applied for employment insurance benefits. More will surely follow. Many employers and employees are wondering about their rights, obligations and options, especially in small businesses.

An employment arrangement is, on a fundamental legal level, a contract. Even if nothing has been formally written – many small businesses don’t write formal contracts – there are terms to the contract. The terms can be determined through a combination of verbal agreements, the conduct of the parties, and terms implied at law. While lay-offs are sometimes contemplated in unionized settings, where a collective bargaining agreement sets out the parameters in which lay-offs may occur, and certain seasonal industries like construction may imply the term based on past practice, for most employment agreements they are not part of the contract.

At common law an employer always has the right to terminate an employment contract, without any particular reason or explanation (provided of course that the rationale doesn’t violate human rights legislation by basing it upon a person’s race, religion, gender, disability etc).  Outside of situations where there may be “just cause” based upon an employee’s misconduct the employer will generally be obligated to pay severance pay, or give advance working notice of the termination.

The term “layoff” generally implies that it is short term, and there is an expected return to work at some point in the future.  However, unless this was part of the contract, failing to pay an employee is really a fundamental breach of the employer’s obligations under the employment contract. Traditionally a layoff that was not bargained for in advance has been treated by the courts as a repudiation of the employment agreement, and a constructive dismissal. While this pandemic is uncharted territory in many respects it seems unlikely to relieve an employer of the obligation to abide by severance pay obligations.

Claims to the Manitoba Labour Board under The Employment Standards Code (“the Code”) may be treated differently than the courts would rule under traditional common-law principles. A layoff may relieve the employer of the obligation to pay severance, in so far as there are claims to the Labour Board under that Code, if the employer re-hires in a fairly short period of time. The provincial government has announced an intention to make amendments to the Code regarding layoffs, in light of this pandemic. However, the precise details remain to be enacted. Regardless of what those amendments entail it is a near certainty that they will not change the law regarding contractual employment principles.

The federal government has also announced various measures aimed at supporting employees and employers through this difficult period. Some have been characterized as essentially permitting employers to quit paying employees for a period of time, while still maintaining the employment relationship. From a legal perspective these announcements are difficult to rely upon. First, there may be some gap between what is announced in a press conference versus the actual substance of the program once the details are produced. Separate and apart from that, it is far from clear, and indeed seems doubtful, that a government support program can suspend contractual employment obligations.

These are difficult, complex situations in a time of unprecedented uncertainty. Employers and employees are advised to tread carefully and seek legal advice when considering how to deal with these situations.