In February 2025, the United States government started a trade war, announcing sweeping tariffs across various countries. While the initial tariffs were paused short term, several tariffs remain in place and tensions have escalated globally as countries, including Canada, have issued retaliatory measures. The magnitude of the tariffs and their uncertainty have already severely undermined the market with recession predictions looming, and caused chilling effects on the Canadian job market as businesses desperately try to adjust.

Many businesses are attempting to reduce expenses, including payroll, to stay afloat.

These are good-faith reasons to mitigate business losses when facing unexpected political and economic turmoil. However, if not handled properly, the businesses’ efforts to reduce their payroll may lead to wrongful termination claims and extra unexpected costs such as termination pay and legal expenses.

Many payroll reduction methods are prone to such risks, such as reducing employees’ compensation, temporarily laying them off, and terminating them without cause.

Reducing an employee’s compensation

An employer may try to reduce an employee’s compensation by (i) reducing their hours of work if they are paid an hourly rate, (ii) reducing agreed compensation, such as salary, and (iii) reducing discretionary compensation, such as bonus and incentive pay.

Suppose the employer reduces hours of work because it does not guarantee hours of work, or reduces or eliminates truly discretionary bonus or incentive pay; that may not trigger claims for constructive dismissal or unpaid wages in that case.

However, under many circumstances, it is implied that there is an expectation of minimum hours of work or bonus or incentive pay. For example, if an employer regularly asks an employee to come to work for a certain number of hours per day over a long period of time, the court may think that there is an oral agreement of how many hours the employee should work each day. Similarly, if an employer consistently pays out year-end bonuses or the incentive pay is purely based on objective criteria, the court may find that the bonus or incentive pay is not discretionary at all but an integral part of their employee’s compensation. In these situations, payroll reduction methods may be a breach of the employment contract, leading to claims for unpaid wages or even constructive dismissal, leading to a substantial amount of termination pay.

Temporary Layoff

Under most circumstances, employers do not have the right to layoff employees, unless explicitly stated in the employment contract.

Without a contractual right to layoff, a temporary layoff will lead to claims for constructive dismissal and termination pay. This means that even though the employer intends for a temporary layoff, the employee and the court may treat it as a permanent termination and ask the employer to make termination pay accordingly.

Furthermore, even if an employer has the right to lay off, there is a time limit under the applicable legislation on how long it can last, or it is deemed termination, and the employer will be liable for their employee’s termination entitlements. For example, under the Ontario’s Employment Standards Act, 2000 (“ESA”), in the non-unionized context, a temporary layoff can last no longer than 13 weeks within any 20 consecutive weeks or no longer than 35 weeks within any 52 consecutive weeks, if other conditions are met.

Termination without cause

In Canada, under most circumstances, employers are able to terminate their non-unionized employees without cause or eliminate positions due to economic hardship, but it will likely entitle employees to termination notice or pay in lieu of such notice.

Many employers believe they can rely on the termination terms of their employment contracts or the applicable employment standards legislation to determine how much termination pay they should pay. Unfortunately, that is usually not the case.  Employment standards legislation sets the minimum entitlements for employees.  However, employees often have greater rights under common law, especially regarding entitlements on termination of employment. The court will presume that employees are entitled to common law reasonable notice upon termination. This does not apply if there is a written contract with termination clauses that (i) clearly contract out that presumed entitlement, and (ii) the written clause is in compliance with the employment standards legislation. In many cases, termination clauses are not written properly so they will be unenforceable.

Especially in recent years, courts have been stringent in scrutinizing termination clauses, and have readily set any aside that do not meet the minimum standards.For example, if the termination clause simply says the employer can terminate the employee without cause at any time, which goes against the ESA, an Ontario tribunal may nullify the termination clause in accordance with the decision of Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029. Without an enforceable termination clause, the employee will likely be entitled to more generous common law termination entitlements, which will probably lead to a wrongful dismissal claim.

Special risk due to trade wars

Another risk the employer should be aware of is the impact of the trade wars may make it longer for employees to secure reemployment.  The trade wars will likely negatively impact many industries or sectors of the job market, reducing the pool of available employment opportunities. Provided evidence is provided about the negative impact, the court may factor in the lack of available work to increase the otherwise applicable reasonable notice entitlement.   In Kraft v. Firepower Financial Corp., 2021 ONSC 4962, a Covid-era case, the court stated at paragraph 22 that “there is evidence that the pandemic impacted on the Plaintiff’s ability to secure new employment. In light of that evidence, he deserves to receive at least somewhat above the average notice period.”  Similar principles will likely be factored in for terminations occurring during the current economic situation, and lead to increases to the employer’s otherwise applicable liability for termination and severance pay.

As such, although reducing payroll to protect the business is a legitimate path, it is filled with landmines, especially during economic uncertainty. If not properly handled, employers may face unexpected legal disputes and termination pay, increased expenses, and even termination of employees whom the employer may want to recall. As such, employers should proceed cautiously and seek professional advice when necessary.