The reimposition and escalation of tariffs between the United States and Canada in 2025 have provoked sharp attention across sectors of the Canadian economy. While much commentary focuses on trade, industry and macro indicators, one of the less visible but deeply consequential domains is the employment relationship. For employers and employees in Ontario (and more broadly in Canada), the ripple effects of tariffs manifest in decisions about staffing levels, restructuring, compensation and the legality of changes to employment terms.

The 2025 Tariff Landscape and Canada’s Response

Beginning in early 2025, the U.S. introduced sweeping tariffs on Canadian goods, ranging from 10 to 25 percent. Notably, tariffs on steel and aluminum have been especially aggressive; the U.S. doubled its tariffs on Canadian steel and aluminum (and derivatives) to 50 percent in June 2025, with no USMCA exemptions. Further, tariffs on autos and auto parts have been targeted: the U.S. imposed a 25 percent duty on Canadian-made automobiles starting in April 2025.

Canada’s Countermeasures and Retrenchment

Canada responded with reciprocal tariffs on U.S. goods, matching dollar-for-dollar many of the U.S. tariff lines. However, in September 2025, Canada announced it would remove 25 percent counter-tariffs on many U.S. goods, though tariffs on steel, aluminum and autos remain in force.

The removal of counter-tariffs was presented as a gesture of de-escalation, but the underlying U.S. tariff structure remains robust. From an employment law perspective, employers in Ontario whose business involves cross-border supply chains, manufacturing, materials sourcing, or export markets will likely feel the stress first and most acutely.

Legal Risks and Pressure Points in the Employment Relationship

Given the economic stressors above, Ontario employers and employees must navigate a complex legal terrain.

Layoffs, Temporary Layoffs, and Termination

In Ontario, non-unionized employers must be cautious when considering layoffs or reductions. A temporary layoff may be permitted only if it is explicitly allowed under the employment contract or collective agreement or if it meets statutory criteria (e.g., a short-term layoff that does not exceed a maximum duration). Otherwise, a purported “temporary layoff” could amount to a constructive dismissal.

In the context of tariffs, some companies may be tempted to temporarily lay off workers while waiting for a resolution in trade policy or hoping for reinstatement once conditions improve. But unless the contract permits it, a court may treat that as a termination.

Termination (Without Cause)

If the employer decides to terminate an employee due to economic hardship (e.g., loss of business attributable to tariffs), it may proceed as a termination without cause, but statutory notice, severance (if applicable), and reasonable notice obligations remain. In other words, tariff pressure does not provide a free pass to bypass employment-law obligations.

Termination offers should be carefully documented and supported by business justification. In any separation, employers must comply with the Employment Standards Act and common law (reasonable notice or pay in lieu).

Constructive Dismissal Risk

In distress, some employers might seek to reduce wages, demote, reduce hours, or change location unilaterally. Under Ontario common law, material unilateral changes to essential terms of employment without consent may constitute constructive dismissal, entitling the employee to treat the contract as terminated and claim damages.

Importantly, citing the tariff-related financial stress may serve as a defence in a legal dispute (i.e. legitimate business justification), but it is not a guaranteed shield. The employer must show reasonableness, fairness of process, and necessity of the change.

Severance and Statutory Minimums

Employees may be entitled to statutory entitlements under the Employment Standards Act, and additional common law notice when terminations or layoffs occur. In a tariff-driven downturn, employers should carefully evaluate the full cost of terminations (including accruals, bonuses, benefits, and potential wrongful dismissal risk) before proceeding.

Adjustments in Hours, Roles, or Compensation

A common response to reduced demand is to cut hours. Whether this is lawful depends on whether the employment contract allows variable hours or whether courts would view an hours cut as a material change (thus risking constructive dismissal). If the reduction is modest and temporary, it might be defensible, but if drastic or indefinite, risk increases.

A 20 percent reduction for six months might be viewed differently than a 50 percent cut indefinitely. Employers should assess whether the change is proportional and necessary and engage in consultation where possible (even if not legally required).

Demotion or Reassignment

Reassigning employees to lesser roles or demoting them is risky. If the new role significantly changes the nature, status or remuneration, it may be considered a constructive dismissal. Tariff impact may justify the need for restructuring, but the employer should proceed cautiously, give notice, consider alternatives, and ideally obtain employee acceptance or a release.

Compensation Changes, Bonuses, Benefits

Employers may be tempted to reduce or eliminate bonuses, perks, or benefits as a cost-saving strategy. While discretionary bonuses may be modified more readily (if not guaranteed), contractual or earned bonuses can be more protected. Removing a promised bonus or benefit may again give rise to constructive dismissal claims.

For benefits, employers should review plan documents and contracts. Some benefits may be mandated by statute; others may have particular contractual protections. Any proposed change should be communicated clearly and perhaps phased, with legal review.

Workforce Restructuring and Downsizing

If a company must restructure to survive, it may consider group layoffs or organizational redesign. Legal risk increases in such contexts:

• Selection criteria: Employers must ensure that layoff selection is defensible (i.e., based on performance, business necessity, seniority) and non-discriminatory. If a selection disproportionately affects a protected group, discrimination risk arises.
• Notice and consultation: While not required under Ontario law like union settings, thoughtful consultation and fairness in the process reduce litigation risk and preserve morale.
• Multiple terminations: When many employees are terminated at once, common law and Employment Standards Act thresholds (e.g. mass termination, severance obligations) may be implicated.
• Surplus staff redeployment: If employees can be redeployed elsewhere in the organization, that may mitigate exposure and reduce claims.

Litigation, Claims and Defences

Employees impacted by tariff-driven adjustments may bring claims such as wrongful dismissal, constructive dismissal, or claims under the Human Rights Code if discrimination is alleged. Even in the absence of a claim, disgruntled employees may raise issues during exit negotiations.

From the employer’s perspective, the existence of tariff-driven financial hardship may be a factor to present in defence (i.e. bona fide business justification), but courts will scrutinize proportionality, fairness, mitigation, alternatives, and process.

Documenting decision-making (financial modelling, forecasts, internal memos, board resolutions) is critical. Employers should maintain contemporaneous records showing why staffing cuts or changes were necessary and that less intrusive measures were considered or attempted first.

Strategic Considerations for Employers in Ontario

Given the legal pitfalls above, employers can take several steps to reduce risk and respond more judiciously in this high-stress environment.

Early Planning, Scenario Modelling and Communication

Employers should engage in scenario planning: model revenue impacts from tariff scenarios (base case, worst case, recovery case). Use those forecasts to identify when cost reduction decisions may become necessary, and how much flexibility exists before drastic measures must be taken.

Transparent, timely communication with senior management and key employees can help prepare the organization mentally and operationally, reducing the surprise factor when changes occur. While caution is needed (avoid committing to changes that may not materialize), early warning and signal setting often help preserve employee trust.

Review and Amend Employment Contracts or Policies

If an employer has not already done so, now is a time to audit employment contracts, policies and employee handbooks to confirm whether they permit temporary layoffs, changes in hours, or job reassignments under specified conditions. In new hires or renewals, consider including more flexible terms (with appropriate legal counsel) to address volatility, with clear limits on modifications and acknowledgment of business risk.

However, in Ontario, there are limits to how far such drafted flexibility will hold up, especially for core employment terms (e.g. pay, job title, hours). The more radical the proposed change, the greater the risk that a court will reject the validity of the term.

Consider Alternatives Before Layoffs

Where possible, employers may consider:

• Voluntary leave or sabbaticals
• Unpaid or reduced-time arrangements agreed by employees
• Redeployment within the company
• Temporary secondment to other business units
• Job-sharing
• Freezing ancillary costs (e.g. travel, perks, capital outlays)
• Retraining or cross-training to shift staff into less affected roles

These alternatives may cost less from a legal risk perspective than outright termination or constructive changes.

Planning Termination Strategically

If termination becomes inevitable, consider timing, grouping, severance provisioning, and negotiation.

• Where possible, group terminations so they are handled uniformly (same terms, same process) to avoid claims of selective treatment.
• Provide fair offers, possibly including enhanced separation packages, in exchange for releases (if justified).
• Where possible, stagger terminations to limit liquidity strain.
• Engage competent employment counsel to review separation agreements, notices, and risk exposure.
• Resist the temptation to treat tariff impacts as a carte blanche justification. Rely on business data and prudent judgment.

Defend Claims Proactively

If litigation ensues, employers should be ready to present financial analyses showing the impact of the tariffs on revenue, margins and forecasts. They should also have evidence that alternative cost-cutting measures were considered, and that employee treatment was consistent across the workforce. Expert testimony on business necessity is also an asset.

The better documented and grounded the employer’s decision-making, the stronger the defence against claims of unreasonable or unfair treatment.

Implications for Employees and How to Respond

There are some steps employees can take to protect their rights if the ongoing tariff landscape threatens their working relationship.

Assess Lawfulness of Temporary Layoffs

Assess whether any purported “temporary layoff” is lawful; if not, treat it as a termination and assert rights accordingly.

Look for Warning Signs of Constructive Dismissal

Watch for unilateral changes (demotion, pay cut, hours reduction) and assess whether they constitute constructive dismissal.

Ask for Clarification

Demand full explanation and documentation when termination or change is proposed, particularly if it is tied to macroeconomic justifications like tariff pressures.

Preserve Records

Document everything and maintain records of correspondence, performance reviews, and other communications. These may be essential in any wrongful dismissal or constructive dismissal claim.

Seek Legal Advice Early

Tariff disruptions heighten risk, and timing matters in signings, responses, and notice periods. Proactively negotiate severance or separation terms, especially if the employer is seeking a signed consent or release.

Employees can better protect their rights by understanding the legal constraints and what is fair in the context of external pressures.

Haynes Law Firm: Experienced Employment Law Advice in Toronto

As shifting U.S.–Canada tariffs disrupt Ontario’s job market, employers must tread carefully when adjusting staffing, compensation, or operations. Employees must also be proactive in protecting their rights in this changing landscape.

Haynes Law Firm helps businesses navigate workforce changes, mitigate legal risk, and ensure compliance with Ontario’s Employment Standards Act. The firm also provides comprehensive representation to employees facing layoffs or changing work conditions due to tariff pressure. Contact us online or call (416) 593-2731 for strategic guidance tailored to your needs.