Tough Economic Times — What Can An Employer Do?

With the decline in general economic activity and increasing competition from low wage countries what can employers do to lower their labor costs?

A human resources professional could help with issues concerning motivation and productivity.  An engineer or technician could help with respect to technology and modernization of processes and procedures.  This article will discuss the legal issues surrounding reduction of workforces or changes in the terms and conditions of employment.

Temporary Reduction of Workforce

Generally speaking an employer has the right to lay off employees due to shortage of work.  However, some employees may be entitled to common law severance or notice where a layoff is not a normally expected as part of that occupation.  For example, construction workers are typically not entitled to notice of layoff, however, a full-time employee of a grocery store would be entitled to notice.  This right of severance pay or notice is only triggered if the affected employee withdraws services and claims constructive dismissal.

In both the union and non-union sectors, programs are available for temporary assistance with reductions in workload through the work share program administered by Employment Insurance Canada.

Permanent Reduction of Workforce

In the event that employees are terminated  (a layoff greater than 13 weeks is deemed to be a termination), rather than being laid off, in most instances both statutory severance and common law severance pay or notice will be required.

Where a large number of employees are terminated the group termination provisions of the employment standards legislation would likely apply to require the employer to give the greater notice sent out in the legislation.

The fact that a business is failing or has insufficient profit to continue is not an answer to a claim for severance pay.

In the union sector collective agreement provisions must be considered. Most collective agreements contain provisions dealing with the employer’s responsibility in the event of shortage of work. Collective agreements often require an employer to a consider issues of seniority before making decisions on temporary or permanent reductions of workforces.

In a limited number of industries or where employment contracts are of definite duration, employers may not have an obligation to pay severance pay on layoff or termination.

Negotiating or Introducing a Reduction of Salary

There is an increasing trend, given present economic circumstances and global competitiveness, for employers to reduce the amount they are paying employees. An example is the impasse between the government and teachers in British Columbia and, most recently, the lockout at the Electro-Motive Diesel plant in London, Ontario.

Electro-Motive locked out its employees after they refused a 50% reduction in pay (which at the time of writing is the standing offer left on the table by Electro-Motive).  The issue in this case and others is whether in the union sector and employer can demand such significant concessions without its conduct being classified as bargaining in bad faith.  In the union sector employers are obliged to bargain in good faith and make every reasonable effort to conclude a collective agreement.  An employer conducting negotiations with the intent of "busting the union" would not be bargaining in good faith and would be subject to complaints to the Labor Relations Board. The Board has a broad jurisdiction to remedy such conduct and to award compensation or order arbitration in appropriate cases.

An employer is entitled to use hard bargaining tactics but it must be prepared to rationally and reasonably explain its demands for concessions to the union at the bargaining table. If the employer makes a reasonable business case for the requirement for such drastic concessions and bargains to impasse it is perfectly entitled to make the kind of offer made in the Electro-Motive case.

In the non-union sector employers have far greater latitude to unilaterally reduce the wages of their employees, however, significant wage reductions could amount to constructive dismissal.  The affected employees could withdraw their services and recover severance pay. There are many techniques available to employers to minimize their exposure to severance pay claims which are beyond the scope of this article. Suffice it to say that employers can reduce wages and compensation without significant exposure to liability if done carefully and respectfully.


In the next few decades we will see a continuing struggle to adjust wages and salaries of Canadians to better reflect their true economic value.  Unions will likely lose the ability to maintain wages at higher levels than are warranted in the long run. Employers will be more proactive in adjusting wages upward and downward to ensure that they are not overpaying for the labor component of the production costs. The courts and labour relations boards will be busy dealing with the legal fallout from such adjustments.  Employers are well advised to seek professional assistance prior to making drastic changes to existing employment relationships.

Alf Kempf is the Chair of Pushor Mitchell’s Employment Law Group. He can be reached by phone at (250) 869-1215, or by email at [email protected].

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