The largest customer of a hypothetical Brampton packaging plant cuts its orders by half with three weeks’ warning. The owner has 40 employees and enough cash for perhaps two months of full payroll. He does not want to lose trained people permanently, so the obvious answer seems to be a temporary layoff: send a group home, call them back when the orders return, and avoid paying anything in the meantime.
That plan may work, but only if two separate legal questions are answered first. Does the employer have the right to lay these people off at all? And how long can the layoff last before the law treats it as a termination, with termination pay and possibly severance pay coming due? Many employers only ask the second question. The first one is often the more expensive mistake.
What follows is general information for provincially regulated, non-unionized Ontario employers. It is not legal advice. A federally regulated employer, such as many interprovincial carriers based in Peel, must look to the Canada Labour Code instead, and unionized workplaces must follow their collective agreements as well.
The Common-Law Problem Comes First
The Employment Standards Act, 2000 (ESA) sets limits on how long a layoff can last. It does not give an employer a general right to lay someone off. At common law in Ontario, unless the employment contract expressly or impliedly permits a layoff, such as through a written clause, a well-established past practice in that workplace, or the nature of a seasonal job, sending an employee home without pay may amount to a fundamental change to the job. That is a constructive dismissal, and the employee could treat it as such and sue for pay in lieu of reasonable notice, potentially many months’ worth, even though the layoff fully complied with the ESA.
So open the contract first. A hypothetical review of your workforce may show three groups:
- Employees with a clear layoff clause, who present a lower risk
- Seasonal or project workers with an established pattern of layoffs and recalls, where past practice may help you, if you can prove it
- Office and management staff who have never been laid off and have no clause, who present the highest risk
For that third group, consider alternatives first, or ask for written consent to the layoff. To be useful, the consent should be voluntary, clear about its terms, and ideally supported by something of value such as continued benefits. Adding a layoff clause during a crisis can be difficult, because changing an existing employee’s contract generally requires fresh consideration.
The ESA Clock
Assuming you have the right to lay off, the ESA then sets a limit. A temporary layoff under the Act falls into one of three bands.
Up to 13 weeks in any 20 consecutive weeks. No conditions apply beyond the general rules. Note that this is a rolling period, not a single block, so short stretches of layoff add together.
More than 13 weeks, but less than 35 weeks in any 52 consecutive weeks. The longer period is available only where one of the listed conditions is met. These include:
- The employee continues to receive substantial payments from the employer
- The employer continues to pay for a legitimate group insurance, benefit, or pension plan
- The employee receives, or would be entitled to but for other employment, supplementary unemployment benefits
- The employer recalls the employee within the time approved by the Director of Employment Standards, or within the time set out in an agreement with a non-union employee
Less than 52 weeks in any 78 consecutive weeks. A further extended layoff is possible, but only under strict conditions. The employer and the employee must sign a written agreement, which is valid only if the employee was told beforehand of the latest recall date and given a statement that the agreement cannot be withdrawn once made. The employer must also apply to the Director on the approved form, and the application must be received at least 30 days before approval is needed. This band is not a substitute for planning, and it does not arise automatically: it needs an employee’s agreement and the Director’s approval.
If a layoff goes beyond the applicable limit, the employer is considered to have terminated the employee, and in general the termination is treated as having happened on the first day of the layoff. That date affects calculations and can surprise employers who thought they had simply been waiting.
How Weeks Are Counted
This is where careful record-keeping pays off, because the ESA does not count time the way an owner might.
For the purposes of termination pay, a “week of layoff” is a week in which the employee earned less than half of what they would ordinarily earn, with limits around weeks in which they were unable or unavailable to work, on a disciplinary suspension, or not working because of a strike or lockout. For severance pay, the Ministry’s guide describes a different measure: a week in which the employee earned less than one quarter of their regular weekly wages.
So cutting hours can create layoff weeks without anyone actually going home. An employee who usually works 40 hours and is reduced to 16 may be in a week of layoff for termination purposes, though not necessarily for severance purposes. The two calculations need to be tracked separately.
Reduced hours bring their own common-law risk as well. A substantial unilateral cut can amount to a constructive dismissal, in the same way as a layoff. Keep a simple spreadsheet for each employee, with the regular weekly earnings, actual earnings per week, and running totals for each period.
When Severance Enters the Picture
Severance pay under the ESA is separate from termination pay. It is generally owed where an employee has at least five years of employment, whether continuous or not, and the employer has a global payroll of $2.5 million or more, or where 50 or more employees are severed in a six-month period because all or part of the business permanently closes.
A layoff becomes a severance when the employee is laid off for 35 or more weeks in a period of 52 consecutive weeks, and those weeks do not have to be consecutive. It also occurs when an employee is still laid off after an approved extended layoff expires.
The formula is one week of regular wages per year of employment, including partial credit for incomplete years, up to 26 weeks. Severance is generally due by the later of seven days after employment is severed or the next regular pay day. Instalments of up to three years are possible with the employee’s agreement or the Director’s approval. A missed instalment makes the whole balance due at once.
Recall rights can change the timing. An employee who has a right to be recalled, usually under a collective agreement, and who is owed termination or severance pay because of a layoff of 35 weeks or more may choose either to keep the recall right, in which case the money is held in trust, or to give it up and be paid. The same choice must be made for both types of pay. For non-union employees, the money is sent to the Director if they retain the right or do not choose.
Budget for the Layoff That Becomes Permanent
Many owners treat a layoff as a saving and only later find that they have merely delayed the bill, sometimes to a moment when cash is shortest. Build a simple model before you send anyone home.
For each employee, write down:
- Start date and any earlier period of service
- Regular wages, overtime patterns, commissions, and benefit costs
- Statutory notice or termination pay, up to eight weeks
- Statutory severance, if your global payroll meets the threshold
- Accrued vacation pay
- An estimate of common-law reasonable notice, if the contract’s termination clause may not be enforceable
- The last day on which recall can happen without crossing a limit
Add a summary column showing the last practical recall date for each person. Those dates will rarely be identical, since prior layoffs and earnings patterns differ. Review the sheet every two weeks.
Severance planning also affects what you tell your bank and accountant. If the slowdown might turn into a closure or a sale, tell them early, because these liabilities can be substantial and directors can have personal exposure for certain unpaid wages and vacation pay under the corporate and employment statutes. A buyer in a purchase and sale of a business will also look closely at them, since service with a predecessor can generally carry over to a successor employer.
Large groups trigger their own rules. Terminating 50 or more employees at an establishment within a four-week period brings mass termination requirements, with notice of up to 16 weeks and a required filing with the Director. Layoffs that run over the limits could count, so a slow decline may unexpectedly cross that line.
Choosing Who Gets Laid Off
You generally have flexibility, absent a contract or collective agreement requiring seniority. That freedom has limits. A selection that falls more heavily on people on leave, those with disabilities, or older workers may raise issues under the Human Rights Code. The ESA also prohibits reprisal and protects employees on statutory leaves. An employer who lays off someone returning from parental leave should have a clear, documented, objective reason and should expect questions.
Write down your selection criteria before you apply them: skills needed, shift coverage, performance data, seniority. Apply them consistently, and keep your reasoning in the file.
Paperwork and Communications
A good layoff letter is short and specific. Say that it is temporary, the start date, the expected recall date if you know it, what happens to benefits, how the person will be contacted, and that they must return when recalled. The ESA says the lack of a recall date does not automatically make a layoff non-temporary, but telling people something reasonable helps them plan, and it helps you keep them.
A Record of Employment must be issued when there is an interruption of earnings, within the federal timelines, so that the employee can apply for Employment Insurance. Mark the reason accurately. Other steps:
- Confirm with your benefits provider what coverage continues and for how long
- Pay out earned wages on the regular pay day, along with vacation pay as your practice or the ESA requires
- Keep a recall list and up-to-date contact details
- Send recalls in writing, with a clear return date and a reasonable time to respond
- Keep proof of recall attempts, since a person who refuses a proper recall may be in a very different position
Meanwhile, consider alternatives that might reduce the need for layoffs. These might include voluntary reduced hours, unpaid leave by request, and federal Work-Sharing support, which is aimed at employers and eligible employees on shorter schedules during a slowdown. Check the Government of Canada’s current program terms, as they do change.
Before the Next Slow Quarter
The cheapest time to deal with layoffs is when you do not need one. A well-drafted employment contract can include a layoff clause that fits the ESA’s conditions. Keep a record of any seasonal pattern. Know your global payroll number. Review termination clauses at the same time, because those are often the source of larger exposure.
If you are already facing a slowdown, a short review of your contracts, service dates, and numbers can tell you who can be laid off, for how long, and what it would cost if recall never comes. You can contact the firm to go through them. The Ministry’s Employment Standards Information Centre also answers general questions at 1-800-531-5551.