BECAUSE OF AND DURING COVID-19, CAN EMPLOYERS LAY OFF OR FIRE EMPLOYEES WITHOUT HAVING TO PAY THE USUAL SEVERANCE? WHAT YOU NEED TO KNOW.
Many employers in the City of Kawartha Lakes, particularly those designated as “non-essential” have been forced to scale-down or cease operating, including by provincial emergency order. Even “essential” workplaces have been forced to lay off, place on infectious disease leave or terminate employees due to the pandemic. Uncertainty abounds for everyone, in terms of the legal rights of both employers and employees.
The virus does not discriminate – it affects all marketplaces, both bricks-and-mortar businesses and those operating by e-commerce.
For more information from us about whether to lay off, terminate or place an employee on a temporary leave of absence, go here: http://wardlegal.ca/31585663827849.
However, during this unprecedented uncertainty, the key question is whether employers are able to terminate an employee, including by failing to recall them after a temporary lay off, without paying the employee statutory minimum entitlements under Ontario’s Employment Standards Act, 2000 (the “ESA”), due to the so-called “frustration” of the employment agreement (i.e., due to the pandemic).
If an employment contract is “frustrated” (a legal concept), an employer is not required to give, or pay, notice of termination or pay in lieu of notice.
The ESA excuses an employer from giving, or paying, statutory termination pay for any employee, “whose contract has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance,” unless the “impossibility or frustration is the result of an illness or injury suffered by the employee”.
In addition, the ESA relieves an employer from paying statutory severance pay for any employee, “whose contract of employment has become impossible to perform or has been frustrated”, unless the impossibility or frustration is the result of: (a) a permanent discontinuance of all or part of the employer’s business because of a fortuitous or unforeseen event; (b) the employer’s death; (c) the employer’s death, if the employee received a notice of termination before his or her death; or (d) an illness or injury suffered by the employee.
Historically, the Courts have interpreted these as catastrophic events causing an employer to shut down, or substantially scale down operations, such as fires, floods, natural disasters or so-called “Acts of God”.
It remains unclear in Ontario, however, whether businesses closing, or reducing employees due to scaled-down operations, due to the pandemic will be viewed by Courts and the Ontario Government as being caused by a “fortuitous or unforeseeable event or circumstance” making the employee’s job impossible to perform.
Beyond the ESA, generally if an employment contract does not contain a force majeure clause, or the clause is of no assistance because of its terms, an employer may, in very limited circumstances, also be able to argue that it is relieved from its contractual obligations by claiming the contract is “frustrated” at common law.
Legally, frustration occurs when an event, through no fault of either party, creates a new circumstance which has the effect of making the contract impossible to fulfill. In such situations, both parties are discharged from further performance of their obligations under the contract. The parties are relieved of their obligations because to force performance despite the new and changed circumstances would be to order the party to do something fundamentally different from what the parties originally bargained for.
The threshold required for frustration at common law is a very high one. In order to rely on it, a party must show that the original reason for entering into the transaction was completely destroyed by a supervening event.
Generally, as in the case of force majeure clauses, our Courts have not accepted economic disruption or falling markets to constitute an event that would frustrate a contract. Courts have generally held that changes to the circumstances must amount to an unforeseen event capable of triggering frustration at common law and that, even if there were, it would be incumbent on the employer to adduce real evidence in support thereof. Courts have also recognized that a business failure caused by cancellation of orders, insolvency, landlord eviction or loss of key personnel could result in an employer not being able to provide continued employment to employees in a workplace. However, generally speaking, these events are considered to be a part of the normal business cycle and cannot be construed as "unforeseen". A business failure for these reasons would not discharge an employer's obligation to provide individual compensation for length of service or group termination under the ESA or at common law, presumably.
Arguably, employers may take the position that their employment agreements have been frustrated because COVID-19 rendered it impossible to perform due to:
• unforeseeable or unpreventable causes beyond the employer's control; or
• a fortuitous or unforeseeable event or circumstance;
• the temporary or indefinite termination of employ because of lack of work; or
• the actions of any government authority that directly affects the operations of the employer, like being designated as “non-essential” (but being permitted to operate by e-commerce, remotely, etc.).
These exceptions would, it appears, clearly be invoked by the COVID-19 pandemic generally and, if so, an employee may not be entitled to any severance.
Logically, if the closure of a business, or reduction in work force, is directly related to COVID-19 and there is no other manner in which the employee could perform work in a different way, such as remotely, these exceptions may apply to exclude employees from receiving both statutory and common law-based compensation for length of service and group termination pay.
However, this may not always be the case.
If an employer terminates an employee for reasons that are not directly related to COVID-19, or if the employee’s work could still be done (albeit in a different way), these exemptions would not seemingly apply.
Each situation is very likely to be determined on a case-by-case basis.
A business failure caused by cancellation of orders, insolvency, landlord eviction or loss of key personnel could result in an employer not being able to provide continued employment to employees in a workplace. These events are considered to be a part of the normal business cycle and cannot be construed as "unforeseen" generally. A business failure for these reasons would not discharge an employer's obligation to provide individual compensation for length of service or mass termination under the ESA. Similarly, business failure for reasons of cancellation of orders, insolvency, Therefore, the employer would not be relieved of the obligation to pay at least statutory termination and severance pay.
Temporary illness, injury or disability is not considered to be an unforeseeable event or circumstance that would discharge an employer’s obligations under the ESA, either. However, if medical evidence shows that an employee is permanently disabled as a result of COVID-19 and will never be able to return to the workplace, there may be frustration at common law, relieving the employer of paying beyond the statutory minimums. Employers must be mindful of their duty to accommodate under Ontario’s Human Rights Code, too.
Therefore, the key points:
- each situation is likely to be judicially addressed on a case-by-case basis;
- it remains the responsibility of both the employee and employer to work together and be flexible to find ways for the employee to perform work in a different way, even if modified, such as working from home, which many employees are now doing;
- the ESA sections referred to above relates only to statutory termination and severance pay, not any applicable common-law entitlement; and
- the test is basically “impossible” to perform – a high threshold for employers to meet.
To terminate any employee, or fail to recall any employee after a temporary lay off, an employer would effectively have to prove that it was impossible to continue employing the employee, in any way or capacity, causing the parties’ relationship to be frustrated.
Employers will need to prove, in each case, that the employee’s employ was impossible to maintain, or frustrated by, COVID-19 (which must be proved as a fortuitous and unforeseen event effecting each, specific employee), failing which the employee will be entitled to both statutory and common law notice entitlements.
April 15th, 2020
Posted in COVID-19