On March 4, 2025, the United States imposed a 25% tariff on a broad spectrum of Canadian goods, including steel, aluminum, automotive parts, and agricultural products that kicked off an ongoing tradewar. While many of the tariffs have been walked back, there is continued trade tensions between the two nations, prompting Canada to implement reciprocal measures. Ontario, for example, has responded by banning American companies from provincial contracts and terminating a $100 million agreement with Elon Musk’s Starlink.

For many Canadian businesses, Trump’s tariffs are an existential threat. To manage this threat and remain competitive, temporary layoffs may be necessary to offset increased operational costs and fluctuating demand. However, unless employee contracts are written properly and are enforceable, the cost of layoffs could be as destructive to the business as the tariffs themselves. Without enforceable layoff clauses any employee laid off will immediately be able to sue their employer for constructive dismissal. The damages could be as much as two years salary and benefits, similar to many cases during the pandemic. In many cases, businesses have not made the necessary adjustments to employee contracts, leaving them vulnerable to the risks associated with the tariffs and the current trade war. This threat is particularly concerning for business that rely on cross-border trade.

Layoffs vs. Terminations

As demand wanes and revenues decline, Ontario employers may be compelled to evaluate strategies to manage employment costs effectively. There are two primary avenues to reduce the workforce: terminations and layoffs. Obviously, termination is a permanent end to the employment relationship. On the other hand, a layoff is usually a temporary reduction of hours or suspension of employment, with the expectation that the employee may be recalled at a certain point. Compared to terminations, layoffs are more nuanced and require extra legal precaution.

Do you really have a right to temporarily lay off your workers?

A prevalent misconception among Ontario employers is the assumed right to impose temporary layoffs solely based on the lay-off provisions of the Employment Standards Act, 2000 (“ESA”). The ESA outlines the maximum length of temporary layoffs:

• Up to 13 weeks in any period of 20 consecutive weeks; or
• More than 13 weeks but less than 35 weeks in any period of 52 consecutive weeks, provided certain criteria are met, such as continuing benefits to the employee.

However, these statutory provisions do not inherently grant employers the unilateral right to lay off employees. If there is no valid clause in the employment contract permitting temporary layoffs, such actions will lead to constructive dismissal under common law, entitling employees to reasonable notice.

Temporary layoff clarification during the COVID-19 pandemic

During the COVID-19 pandemic, many employers experienced financial difficulties that led them to implement temporary layoffs without valid provisions, resulting in constructive dismissal claims and significant termination damages.

In Fogelman v. IFG, 2021 ONSC 4042, an employee with 11 years of tenure was “temporarily laid off” due to a business downturn. He successfully claimed constructive dismissal, which resulted in the employer being ordered to provide 15 months’ notice and additional damages totalling $178,218.13.

Subsequently, recognizing the unprecedented nature of the pandemic, Ontario enacted the Infectious Disease Emergency Leave, O. Reg. 228/20, on July 22, 2022. This regulation stipulated that temporary reductions or eliminations of an employee’s hours or temporary reductions of wages for COVID-19-related reasons would not constitute constructive dismissal. In other words, employers were protected from the risk of constructive dismissal claims arising from COVID-19-related temporary layoffs.

Will Ontario employers enjoy similar legislative protection when faced with this “War of Tariff”? Likely not.

Proactive measures for employers

To reduce potential legal risks associated with layoffs resulting from tariffs, Ontario employers should take proactive steps:

1. First, employers should review all employment contracts to ensure they contain clear and enforceable clauses that allow for temporary layoffs.
2. If there is any uncertainty, it is advisable for employers to consult with legal counsel before proceeding with layoffs.
3. With the assistance of legal counsel, employers should create a comprehensive plan for workforce reduction.

As Ontario deals with the impact of new tariffs and the economic challenges that follow, employers need to approach employee layoffs carefully. It is important to get a clear understanding of the laws around temporary layoffs to avoid issues like costly constructive dismissal claims. By taking the time to review employment contracts and consult with legal experts, employers can create strategies that protect their business and reduce legal risks. As the economic and political situation keeps changing, these proactive steps will be key to maintaining business stability despite ongoing trade difficulties.