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Cutting Compensation Costs in the Recession
By Earl Altman, Employment Lawyer
The current economic climate has made the need to reduce employee
compensation costs an urgent matter for many companies. Faced with
declining revenues, customer insolvencies, and reduced access to
credit, many companies are looking at their head count as a source
of possible cost reduction. Unfortunately, there is a great deal
of misconception among human resource practitioners as to the rights
of employers to “lay off” non unionized employees on
either a permanent or temporary basis.
Every employment relationship is based on a contract between the
employer and the employee. Even in instances where there is no written
agreement, a contract of employment exists. The basic obligation
of the employer under that contract is to pay the employee the agreed
upon compensation in exchange for performing the work which the
employee has agreed to perform. As long as the employee continues
to perform that job in a satisfactory fashion, any change in the
employee’s compensation will be, prima facie, a breach of
the employer’s obligations under the contract. Therefore,
in the absence of a statutory provision, or a provision in an employment
contract permitting the employer to “lay off” the employee,
doing so would be a breach of contract, entitling the employee to
compensation for losses resulting from the breach.
Section 56(1) of the Employment Standards Act deems that an employee
has been dismissed if the employee is laid off for a period longer
than that defined to be a temporary lay off under the Act. For the
purposes of the Act, a temporary lay off is deemed to be a lay off
of not more than thirteen weeks in any period of twenty consecutive
weeks, or a lay off of more than thirteen weeks in any period of
twenty consecutive weeks where the lay off is for less than thirty
five weeks of fifty-two consecutive weeks, and the employer continues
to make substantial payments to the employee, continues to make
payments under the employee’s retirement or pension plan,
pays supplementary unemployment benefits, or, where the employee
is not represented by a union, the employee is recalled within the
time frames set out in that section. Therefore, employers considering
such a lay off have to make sure that they meet the requirements
of that section. Legal advice should be obtained before any such
program of temporary lay off is imposed.
Similarly, some employers have considered the option of a reduced
work week for employees, in essence imposing a work sharing program
in order to maintain everyone’s employment. The above comments
with respect to compensation apply equally to the hours of work.
If an employee was hired on the basis of forty hours of work a week
in exchange for the agreed upon compensation, a reduction in the
hours worked to thirty, with a proportionate reduction in compensation
would also constitute a breach of a material term of the employment
contract. Absent an agreement by the employee, such a material change
would constitute a constructive dismissal.
These issues were considered by the Ontario Court of Appeal in
the recent decision in Wronko v. Western Inventory Service Limited.
The employer in this case attempted to unilaterally change the terms
of an employment contract in the face of objections by the employee.
The Court in Wronko pointed out that where the employer is seeking
to make such unilateral changes, it can only do so by terminating
the existing contract of employment, paying reasonable compensation
for such termination, and then entering into a new contract with
the employee. Where the employee then agrees to the terms of the
new contract, assuming no duress, the employee cannot be said to
have been constructively dismissed.
If the employer decides to proceed with the unilateral alteration
of the contract in the absence of agreement and appropriate notice,
what damages will then be payable for the constructive dismissal?
In particular, what impact will the deepening recession have on
the quantum of damages to which the employee will be entitled?
As an initial comment, the writer has had numerous employer clients
express the view that a dismissal of an employee was not wrongful
when the dismissal was due to economic factors outside the control
of the employer. The case law in Ontario is clear that economic
hardship being suffered by the employer will not constitute cause
for dismissal. In fact, the Court of Appeal has clearly stated that
the economic climate will be considered among the factors in determining
reasonable notice, and that a poor economic climate will support
a lengthening of the period of reasonable notice.
Employers faced with the unfortunate economic reality of declining
revenues may have no choice but to thin the ranks of their salaried
employees in order to cut costs. The Ontario Court of Appeal has
made it clear that the proper way to do so is to terminate the employment
contract on adequate notice, or payment in lieu of notice. Once
the contract is properly terminated, the employer can offer the
employee alternative employment on reduced compensation. The courts
have indicated that, where an employee is dismissed without cause,
and a position at a reduced salary is offered with the same company,
the employee is obligated to accept such a position as part of his
duty to mitigate. The employee is then entitled to damages based
solely on the difference in compensation between the old position
and the new one, for the period of reasonable notice.
In instances where the employee accepts the new, lower salary
position, she is still obligated to mitigate her damages by trying
to secure alternative employment at a rate of pay closer to that
which prevailed before the reduction. The employer must afford the
employee reasonable opportunity to make such mitigation efforts
- for example, by allowing for time off to attend interviews. Where
appropriate, the employer should provide a positive letter of reference
and any other reasonable assistance in the employee’s re employment
efforts. If the employee is successful in finding such a position,
the employer’s liability will end.
No doubt, employers will have to exercise some degree of creativity
in dealing with their compensation costs during the next twelve
months. If you would like to explore these options, kindly contact
Earl Altman of our office.
If you have any questions regarding the information in this
Newsletter, please contact Earl Altman, or any of the other lawyers
in our office - Garfinkle, Biderman LLP - ealtman@garfinkle.com.
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