Ever since the pandemic, the topic of layoffs has gained considerable attention. In 2023, 2024, and beyond, layoffs are ongoing matters that affect many employees. It is important to consider the legal consequences that can flow from a layoff. The terms of the employment agreement and the conduct of the employee and employer at the time of the layoff may also impact these consequences. In particular, it may be possible to find that there has been a constructive dismissal if an employee has been laid off, which would mean that they are entitled to certain damages. 

In this post, we will discuss the connection between layoffs and constructive dismissals and what can happen when the employment contract does not contain terms on layoffs. We will discuss whether there can be implied agreement terms to a layoff if the contract does not specify layoff terms. We will discuss a case example, Pham v. Qualified Metal Fabricators Ltd., 2023 ONCA 255, in which there was no implied term that the employee agreed to the layoff. This post will provide important insights for employees seeking to understand their rights when laid off and for employers to understand their obligations if they are laying off employees, including considerations for what should be included in the employment contract at the outset. 

What is the connection between a layoff and a constructive dismissal?

A constructive dismissal can occur where:

  1. The employer breached an essential term of the employment contract or
  2. The employer’s conduct establishes that it no longer intends to be bound by the employment contract. 

When an employer decides to lay off an employee unilaterally, it will be considered a substantial change in the employment contract if there is no express or implied term in the employment agreement that authorizes this course of action. As a result, an employee can pursue a constructive dismissal claim, which applies even for temporary layoffs. 

What happens when there is no term in the employment contract regarding a layoff?

If the employment contract does not contain explicit terms regarding a layoff, the employer may have an implied right to lay off the employee. However, this will only be the case for situations where it is very clear that there was an implied agreement. In particular, if the employee’s co-worker had previously been laid off, this alone is not enough to establish that the employer had a right to lay off the employee. If a right to lay off the employee is implied, it must be very obvious based on the case facts. 

Under sections 56(1)(c) and 56(2) of the Employment Standards Act (ESA), the laid-off employee has 35 weeks to wait and see if they will be recalled to work before ending the employment relationship by beginning their constructive dismissal claim. If the layoff is longer than 35 weeks, it is deemed a termination. 

When is there an implied agreement to a layoff?

While there was previous case law that suggested an employer’s past practices in laying off employees could produce a right to lay off an employee, the Court of Appeal in the Pham case clarified that the case involved a small family-owned business, so the circumstances were not applicable in all cases and this did not represent a general rule. The Court of Appeal also confirmed that at common law (i.e. outside of the employment agreement), the employer does not have a right to lay off an employee. 

If employee condones layoff, there may be no constructive dismissal 

In the Pham case, the employer laid off several employees during the pandemic. The employee was laid off and received several extensions before bringing the matter to court. 

The employee claimed constructive dismissal

In their defence, the employer claimed that the employee had condoned the layoff, so he could not claim that he was constructively dismissed. To find this, the employer was required to show that the employee consented freely to the layoff as a change in the employment contract.

At trial, the court found an implied term of agreement towards the layoff, which was justified. 

The employee appealed.

The Court of Appeal found that the lower court judge erred in dismissing the matter, as it was not established that the employee condoned the layoff. 

In particular, the employee had signed a layoff letter, but this was not considered condoning it as it was simply an acknowledgment of receiving the terms the employer had set out regarding the layoff. By signing the letter, the employee was not acknowledging agreement with the terms, just receipt of the terms. 

Also, the fact that the employee did not object to the layoff did not mean he condoned it. This was because the employee is entitled to a reasonable time to assess contractual changes before they are required to take a stance on their legal position. The court recognizes that employees are vulnerable, so allowing them time to consider their next step is important, as it could drastically change the employment relationship. In the Pham case, the court also found that each layoff notice he received would renew the 35-week ESA period, allowing him to wait and see how the employer would proceed. The employee’s silence was insufficient to find that he condoned the layoff. 

Condoning a layoff requires action on the part of the employee, including expressed consent to the layoff or expressing a willingness to work before claiming wrongful dismissal. These situations would justify an employer’s reasonable belief that the employee consented to the change in employment terms. These circumstances were not established in the Pham case.

The Court of Appeal, therefore, concluded that the employee’s case for constructive dismissal should not have been dismissed, and the parties were to return to trial to determine the issue. 

Key Takeaways 

It is important for employers to clearly define the terms of a layoff in an employment contract. Otherwise, it can be difficult to establish that there were implied terms of agreement towards the layoff, and the employee may have grounds to claim constructive dismissal for a unilateral change in the employment agreement. While this may depend on the circumstances of the case as a whole, an employee’s lack of objection to the layoff alone is not enough to establish that they condoned the layoff and could no longer make their claim for constructive dismissal

Contact Haynes Law Firm in Toronto for Advice on Layoffs and Constructive Dismissal Claims

Employers and employees should carefully consider the legal consequences of a layoff. If the employment contract does not contain express terms regarding a layoff, an implied agreement towards the layoff must be clear from the circumstances. Otherwise, there may be a wrongful dismissal, and employers may need to provide pay in lieu of reasonable notice. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from termination. For employees, our goal is to ensure that they understand their rights and receive maximum compensation in wrongful dismissal cases. Haynes Law Firm also assists employers in avoiding liabilities that may arise from terminations that are not permitted by the legislation. We are dedicated to finding the best resolution for you.

To book a consultation, please contact us online or by phone at 416-593-2731.