Managing Your Workplace in an Economic Downturn Dean Palmer Lorraine Allard Kate McNeill Brian Wasyliw March 12, 2009 McCarthy Tétrault LLP Box 48, Suite 5300 Toronto Dominion Bank Tower Toronto ON M5K 1E6 www.mccarthy.ca Managing Your Workplace in an Economic Downturn Introduction Despite the legal requirements and obstacles that must be considered, there are positive steps that employers can take to reduce labour costs now while preparing for the better times to come in the future. This paper is designed to provide an overview of the options available to employers and the legal considerations that must be included in any strategic decision impacting on the workforce. It also identifies practical employment-related considerations that may impact on the cost-benefit analysis that you will be conducting when making such decisions. This paper focuses on the applicable legislation in Ontario. For workplace decisions in other provinces, the applicable federal or provincial legislation should be considered. Finally, each of the options outlined in this paper are described in general terms. For specific application relating to your workplace, please feel free to contact any of the members of our Labour & Employment Department or Pensions & Benefits Department who would be pleased to assist you in developing the most appropriate specific strategy for your business. Option 1 – Reductions in Head Count One of the first cost reduction options that springs to mind in the event of economic pressure on a workplace is a reduction in head count either by way of terminations of employment, temporary lay-offs or voluntary retirement. A. Terminations Terminations of employment that are tied to economic reasons and the restructuring of a workplace are considered to be without cause terminations and result in a permanent reduction in head count. This is the most drastic option as a result of its permanence and may be an expensive option given the upfront cost of severance packages. However, it does present an opportunity to critically assess your workforce and eliminate employees who have performed poorly. The key point is to keep your strong employees and part with the weak. As a result, the cost of a fair severance package may in fact be a worthwhile investment in building a high performance workforce. Individual Terminations In the absence of an enforceable written contractual termination provision in an employment agreement that dictates what an employee is entitled to in the event of a without cause termination, the common law implies an obligation to provide the employee with reasonable notice which is calculated based on criteria including the employee’s age, length of service, the character of the position and the availability of suitable alternative employment. This is over and above but inclusive of the statutory notice of termination or pay in lieu thereof to which employees are entitled under the Ontario Employment Standards Act, 2000 (the “ESA”). Page 1 Managing Your Workplace in an Economic Downturn Under the ESA, when terminating the employment of someone who has been continuously employed for three (3) months or more, the employer must provide either: (a) written notice of termination; or (b) termination pay in lieu of notice; or (c) a combination of the two. If written notice is given, the employee must be paid his or her regular wages throughout the notice period. The benefit of giving working notice rather than pay in lieu thereof is that you derive the benefit of the employee’s continued work efforts during the course of the notice period. The risk, however, includes the potential impact on employee morale, quality of work, loss of confidential information, disruption of customer relationships and the overall impact on the workplace. The amount of written notice that is required is entirely dependent on how long the employee has been employed by the employer. The ESA specifies the following mandatory minimum notice periods: Length of Employment Amount of Notice Required Less than 3 months No Notice Required 3 months or more but less than 1 year 1 week 1 year or more but less than 3 years 2 weeks 3 years or more but less than 4 years 3 weeks 4 years or more but less than 5 years 4 weeks 5 years or more but less than 6 years 5 weeks 6 years or more but less than 7 years 6 weeks 7 years or more but less than 8 years 7 weeks 8 years or more 8 weeks In the event that the employer opts to provide the employee with termination pay in lieu of notice, the employer must pay the employee a lump sum payment equal to the regular wages for a regular work week that an employee would have earned during the notice period had notice been given. It is important to note that the term “regular wages” under the ESA includes all wages other than overtime pay, vacation pay, public holiday pay, premium pay, termination pay and severance pay and certain contractual entitlements. Further, a special method for calculating termination pay applies to employees who do not have a regular work week or are paid on a basis other than time worked (e.g. employees who work on a commission-basis). In addition to notice or pay in lieu thereof, under certain circumstances, there is a statutory obligation in Ontario to pay severance pay. An employee qualifies for severance pay when his/her employment is severed and he/she: Page 2 Managing Your Workplace in an Economic Downturn (a) has worked for the employer for five (5) or more years (whether continuous/active employment or not); and (b) was employed by an employer who: (i) has a payroll in Ontario of at least $2.5 million; or (ii) severed the employment of fifty (50) or more employees in a six (6) month period because all or part of the business was permanently discontinued (discussed below). Severance pay is calculated by multiplying the employee’s regular wages for a regular work week by the sum of (i) the number of completed years of employment and (ii) the number of completed months of employment divided by twelve (12) for a year that is not completed. The maximum amount of severance pay required to be paid under the ESA is the employee's regular wages for a period of twenty-six (26) weeks. Mass Terminations Under the ESA, a mass termination occurs when fifty (50) or more employees in the same establishment have their employment terminated within a period of any four (4) consecutive weeks. In the event of a mass termination, notice must be given to the Director of Employment Standards (Ministry of Labour) before the notice of termination to employees (or pay in lieu of notice) can commence. This notice must also be posted in a conspicuous location in the workplace on the first day of the notice period. The notice to the Director must be in the prescribed form, is effective as soon as it is received by the Director and may include the following information: • the name and address of the employer; • the locations where terminations will take place; • the total number of hourly, salaried and other employees at each location; • the total number of employees who will be terminated at each location and the expected date of termination; • the name of the trade union representing the employees, if any; • the economic circumstances surrounding the terminations; • the alternatives to termination implemented and discussed; and • any adjustment measures discussed with employees and their agent, if any. Under the mass termination provisions of the ESA, the statutory working notice or pay in lieu thereof that must be provided is dependant on the number of employees terminated rather the employee’s length of service, and therefore is considerably higher than the ESA notice requirements that apply in the case of an individual termination: Page 3 Managing Your Workplace in an Economic Downturn Number of Employees Terminated Amount of Notice Required 50 or more but less than 200 8 weeks 200 or more but less than 500 12 weeks 500 or more 16 weeks It should be noted that in addition to this ESA notice, both the common law notice and ESA severance pay still apply as well. In most cases, it is the common law obligation that is the greatest and it is the common law obligation that will drive your budget planning in a downsizing. Further, except for the employee’s statutory severance pay entitlement, the employer may give working notice of termination, in whole or in part. In other words, the Court will consider the period of working notice as well as any lump sum payments (including amounts paid pursuant to the respective statute but excluding accrued vacation pay) in determining whether the employee was given reasonable notice of termination and/or pay in lieu of such notice. Benefits During Notice Periods In both an individual and mass termination situation, at a minimum employers must continue to make the benefit plan contributions required to maintain an employee’s benefit plans during the statutory notice period. This applies regardless of whether the employee has received pay in lieu of notice or has worked part or all of the notice period. Also, during the common law (or contractual) notice period, an employer is liable for all remuneration (including benefits) that an employee would have received had he or she been working during that notice period, subject to and in accordance with the terms and conditions of the applicable plans. Accordingly, in order to minimize exposure to possible liability from a benefits perspective, it is advisable for employers to maintain benefit coverage for such employees during the notice period pending the signing of a binding release.