Before the Layoff: Key Legal Considerations for Canadian SMEs Facing U.S. Tariffs
The Business Reality: Adapting to New Tariffs and Workforce Challenges
The U.S. government’s recent 25% tariff on Canadian imports has placed significant financial strain on Canadian businesses, particularly in manufacturing, automotive, steel, and agriculture sectors. SMEs in Ontario, Quebec, British Columbia, and Alberta are among the most affected, given their reliance on cross-border trade. Many businesses may feel pressure to cut costs, with employment contract adjustments, layoffs, or severance considerations appearing as immediate solutions. However, before making any decisions, it’s crucial to understand the legal, financial, and operational implications of employment changes.
For more details on affected sectors and tariffed products, visit Government of Canada’s Tariff Announcement.
Layoffs: What Canadian Employers Need to Consider Before Taking Action
While layoffs may seem like a necessary cost-cutting measure, they can lead to long-term setbacks, such as reduced morale, loss of talent, and wrongful dismissal claims. Canadian employment law, including the Ontario Employment Standards Act (ESA), Quebec’s Act Respecting Labour Standards (ALS), British Columbia’s Employment Standards Act (BC ESA), and the Canadian Labour Code, imposes strict regulations on layoffs, severance, and terminations. Businesses must ensure compliance to avoid costly legal disputes.
A key factor to consider is that temporary layoffs are not automatically allowed under Canadian employment contracts unless explicitly written into the agreement. If an employer imposes a layoff without contractual permission, the employee could claim wrongful dismissal and seek severance compensation.
Exploring Alternatives to Layoffs
1. Salary Adjustments & Reduced Work Hours
Rather than letting employees go, SMEs may consider salary reductions or reduced work hours to manage payroll expenses. However, wage reductions require employee consent under the ESA. A unilateral pay cut could lead to constructive dismissal claims, exposing businesses to potential legal action.
Alternative Solutions
- Implement voluntary unpaid leave programs.
- Offer reduced working hours with proportional pay adjustments.
- Introduce temporary pay deferrals with structured repayment plans.
2. Reassigning or Reskilling Employees
Instead of downsizing, consider reassigning employees to different roles or investing in reskilling programs. This strategy helps maintain institutional knowledge and allows businesses to adapt to shifting market demands.
- Reskilling Example: A manufacturing business impacted by steel tariffs could retrain workers for quality assurance or logistics roles rather than cutting jobs.
If Workforce Adjustments Are Necessary, What Are Your Legal Options?
1. Temporary Layoffs vs. Permanent Terminations
Under provincial employment laws, temporary layoffs can be implemented under specific conditions but have strict timelines:
- In Ontario, layoffs cannot exceed 13 weeks in a 20-week period without triggering termination obligations.
- In Quebec, temporary layoffs exceeding six months are considered terminations.
- In British Columbia, an employee temporarily laid off for more than 16 weeks in a 24-week period is deemed terminated.
Key Considerations:
- Is the layoff truly temporary, or is termination inevitable?
- Are there recall rights and obligations?
- Have employees been given adequate notice?
2. Severance Pay and Legal Risks
If layoffs turn into terminations, severance pay may be required, depending on the employee’s tenure, position, and contract terms.
- Ontario ESA requires severance pay for employees with five or more years of service in companies with an annual payroll of at least $2.5 million.
- In Quebec, severance obligations vary based on years of service but must align with Act Respecting Labour Standards.
- British Columbia law requires compensation or working notice based on length of service.
- Failing to provide appropriate severance could result in wrongful dismissal claims, leading to financial penalties.
3. Contractor Agreements vs. Employee Agreements
SMEs may assume that terminating contractors is simpler than employees, but misclassification can lead to legal disputes.
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Legal Considerations for Workforce Adjustments
1. Full-Time Employees:
✅ Review Employment Contracts:
- Confirm if temporary layoffs are permitted.
- Check termination clauses for compliance with provincial standards.
- Assess compensation adjustment clauses—are pay cuts allowed?
✅ Legal Obligations:
- Ensure notice and severance align with ESA and provincial requirements.
- Provide proper documentation during layoffs or terminations.
- Avoid constructive dismissal by obtaining consent for any contract changes.
2. Part-Time Employees:
✅ Contract Consistency:
- Ensure employment terms reflect entitlements similar to full-time employees.
- Review agreements for clauses on reduced hours or flexible roles.
✅ Rights and Entitlements:
- Part-time employees are entitled to notice and severance as per employment standards.
- Document any changes formally and maintain transparency.
3. Contractors:
✅ Classification Check:
- Reevaluate worker status—use checklist criteria to confirm independent contractor vs. employee.
- Contracts should clearly define project scope, duration, compensation, and termination.
✅ Tax and Payroll Compliance:
- Verify no inappropriate deductions are made from contractor payments.
- Ensure contractors are aware of their tax obligations.
4. General Legal Provisions to Revisit:
✅ Notice and Termination Clauses:
- Ensure compliance with provincial and federal law requirements.
- Differentiate between without cause vs. for cause terminations.
✅ Layoff and Temporary Leave Policies:
- Check if policies comply with current legal standards and are communicated to employees.
✅ Dispute Resolution Mechanisms:
- Update any mediation or arbitration clauses to reflect fair and transparent processes.
✅ Confidentiality and Non-Compete Clauses:
- Review to ensure they conform to recent legal standards and are enforceable.
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Consult an Experienced Employment Lawyer to Avoid or Resolve Disputes
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