Layoffs, dismissals and pay cuts: employers in Canada and the U.S. weigh options in response to tariffs

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

Canadian and U.S. employers may be forced to consider difficult choices for their workforces in response to the tariffs that their governments have threatened to impose against each other.

In this brief we cover key issues that employers should be considering as they formulate their strategies, with a focus on three central options: temporary layoffs (referred to as furloughs in the U.S.), dismissals and pay cuts.

• Temporary layoffs or furloughs. Some Canadian employers will be able to respond effectively to the tariffs with temporary layoffs or furloughs, while others will face constructive dismissal risks if they pursue this option. Similarly, most U.S. employers will be able to furlough employees as a temporary response to the tariffs.
• Dismissals. Workforce dismissals—also know as terminations of employment—are typically an expensive and legally onerous option for Canadian employers. Dismissals in the U.S. are considerably more manageable than in Canada.
• Pay cuts. Unilateral pay cuts present constructive dismissal risks to Canadian employers and breach of contract risks to U.S. employers, but some employees may be persuaded to consent to cuts.

Can employers temporarily lay off employees in response to the tariffs?

A temporary layoff or furlough is a temporary pause in the employee’s obligation to work and the employer’s obligation to pay the employee. It is not a permanent severing or termination of the employment relationship.

In Canada, union employees may be temporarily laid off from their employment, subject to the terms of their collective agreements. Employment standards statutes also generally permit employers to temporarily lay off their employees for a period of time without triggering a termination of employment. However, many court decisions have made it clear that a temporary layoff of non-union employees without pay constitutes a constructive dismissal from employment, in the absence of an express or implied contractual right to do so or the employee’s consent. Canadian employers should, therefore, carefully weigh the risks and benefits of a layoff before implementing one.

U.S. employers tend to have more flexibility to furlough employees than in Canada. There is generally no statutory constructive dismissal claim, and common law claims of constructive dismissal absent a discriminatory or unlawful action by the employer are rare. However, collective bargaining agreements in the case of union employees, and other contractual obligations or applicable labor laws in the case of non-union employees, may require employers to provide advance notice of a furlough or payment of wages for some or all of the furlough period.

What are the implications of dismissing employees in response to the tariffs?

In Canada, dismissing—or terminating the employment of—union employees in response to tariffs is generally not an immediate option; rather, the employer will be required to first follow the temporary layoff provisions of its collective agreement. Dismissing non-union employees for economic reasons, such as a loss of business resulting from tariffs, is an option, but it can be an onerous one. Employers must consider their termination obligations to non-union employees under statute, contract and common law (or, in Québec, civil law). They must also ensure that their dismissal decisions are defensible at law, including that they are not based on any prohibited ground of discrimination or a reprisal. Employment standards legislation define minimum termination entitlements, but contractual and common law (or civil code) obligations can be significantly greater. Dismissing a significant number of employees in a short timeframe may also trigger mass termination or collective dismissal laws. Canadian employers usually, therefore, tend to regard workforce dismissals as an option of last resort, especially for longer-service and higher-earning employees.

Similar to Canadian employers, U.S. employers will have limited ability to dismiss union employees in response to tariffs, as the collective bargaining agreements typically provide covered employees with various procedural and substantive protections. Terminating non-union employees, however, is considerably easier in the U.S. than in Canada. In the U.S., employment for non-union employees is at-will, absent a contrary contractual provision, which means that the employment relationship can be terminated by either party at any time and for any reason. Nonetheless, employers should use caution to ensure employees are not dismissed in a discriminatory manner or for other unlawful reasons. Similar to Canadian employers, U.S. employers wishing to dismiss a significant number of employees in a short period of time will need to consider any additional obligations under federal and state mass termination laws.

Can employers implement pay cuts in response to the tariffs?

Canadian and U.S. employers alike cannot unilaterally implement pay cuts to union employees—they must abide by their collective agreements. Canadian employers also face constructive dismissal risks if they unilaterally cut the pay of non-union employees. U.S. employers may not be subject to a constructive dismissal claim, but they would face a breach of contract claim.

Some employees may be persuaded to consent to pay cuts, particularly if they find the proposed terms for the cuts reasonable in the circumstances. Seeking employee consent to pay cuts was, for example, a successful strategy for some employers in the early stages of the COVID-19 lockdown. Some employers in the U.S. preferred to defer wages rather than reduce them, but such an approach requires careful planning to avoid tax issues.

Looking ahead

We are still in the early stages of the tariffs. We do not know how long they may last and whether they may be increased or decreased. We do know that the tariffs will impact employers to varying degrees and at different times. New government programs that may be released in response to the tariffs may also impact employer decision-making. However, as the tariff situation is rapidly evolving, all employers should now consider their workforce options and begin to develop a strategy that not only achieves their business objectives but complies with the labyrinth of applicable laws.

 
Read more Tariffs and trade briefs.