The legal ins and outs of the oft-misunderstood layoff

The headlines are becoming familiar — again. Layoffs at major employers. Manufacturing retrenchment in Ontario. Trade uncertainty resurfacing through the renegotiation of the Canada–United States–Mexico (CUSMA) agreement.

For many Canadian businesses, this is not yet a crisis, but it is unmistakably a moment of caution. And when caution turns to cost-cutting, layoffs are never far behind.

But layoffs, despite their frequent use, remain widely misunderstood. Both employers and employees often treat them as a simple pause in the employment relationship. In law, they are anything but.

Under Ontario's Employment Standards Act (ESA), which is similar to legislation in most jurisdictions, with slightly varying timetables, a layoff is only lawful if it is temporary. That sounds straightforward, but the statutory framework is not.

In most cases, a temporary layoff cannot exceed 13 weeks in a 20-week period. There is an extended window — up to 35 weeks in a 52-week period — but only where the employer continues to provide meaningful compensation, such as benefits or partial wages.

Even then, the ESA answers only part of the question. It defines what is permitted, but it does not grant employers the right to impose layoffs in the first place.

That distinction is where many organizations get into trouble.

Absent an express contractual term or a well-established workplace practice accepted by the employee, a layoff amounts to a fundamental change in the employment relationship.

In other words, it is a constructive dismissal from day one. The employee is entitled to treat the relationship as terminated and pursue severance that dramatically exceeds ESA minimums.

This is where the legal and practical realities sharply diverge.

Employers frequently assume that because the ESA contemplates layoffs, they are free to use them as a tool. Courts have consistently said otherwise.

The risks do not end there.

If a layoff exceeds the ESA's time limits, it is deemed a termination. If an employee is recalled but returned to a diminished role — say, a senior executive reassigned to a more junior position — the constructive dismissal issue simply arises later in the process. The employment relationship may continue on paper, but not in substance.

And yet, even where constructive dismissal is established, employees should not assume a windfall. Many employment agreements now attempt to limit severance to ESA minimums, even in cases of constructive dismissal.

While such clauses are frequently litigated — and often struck down — they remain a significant factor in assessing risk. For example, if the termination clause does not specify that it deals with constructive dismissals, a court might find that constructive dismissals are not covered.

There is also persistent confusion in the marketplace between layoffs and terminations. Employees are routinely told they have been "laid off" when, in fact, they have received a termination letter and a severance offer. That is not a layoff. It is a dismissal — one that more often than not comes with an offer well below common law (i.e., the employee's actual legal entitlements).

For employers undertaking broader workforce reductions, the stakes are even higher. A "temporary" layoff strategy can quickly morph into a mass termination if employees are not recalled within statutory limits.

In Ontario, dismissing 50 or more employees at a single establishment within a four-week period triggers mass termination provisions, including mandatory notice to the province's Director of Employment Standards. Similar regimes also exist federally and in other provinces.

Compliance failures here are not technicalities. They are liabilities.

Employees are not without obligations of their own. The duty to mitigate (i.e., accept comparable employment) remains central. If an employer offers reinstatement into a comparable role, an employee who refuses that offer risks undermining their claim for damages. Courts are increasingly prepared to reduce or even deny recovery where mitigation is ignored.

Likewise, an employee who has agreed to a layoff cannot simply decline a proper recall. Refusing to return to the same position may be treated as resignation or job abandonment, eliminating any entitlement to severance altogether.

The bottom line is this: layoffs are not a neutral holding pattern. They are a legal minefield.

In periods of economic uncertainty, businesses understandably seek flexibility. Employees understandably seek security. The law, as usual, offers neither side an easy path.

What it does offer is clarity. But only if you know where to look.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario and Alberta, and British Columbia. He practices employment law in eight provinces and is the author of six books, including the Law of Dismissal in Canada. Jensen McCauley is an associate at Levitt LLP.