Does economic downturn mean increased
or decreased severance?
By Gina Ross
20 April 2015
Understandably, both employees and employers believe that economic conditions should impact the obligations of notice or severance.
True or False? (Read to the end for the answers)
1.
2.
3.
4.
During an economic downturn, employers pay less severance to departing employees to reflect the surrounding poor economy.
Where an employer is losing money in an economic downturn, the courts will exercise discretion to shorten the notice period and award less in the way of severance.
When an employer does not have the resources to pay employees severance, that lack of money constitutes just cause to terminate without notice or severance.
An employee cannot claim constructive dismissal due to a wage reduction if the employer's reason for reducing wages is impending insolvency.
Employees and employers alike read the dire statements in the media that inevitably surface during an economic downturn. Witness recent statements from Statistics Canada that "employment in Alberta fell by 14,000 jobs in February, the worst monthly drop since the 2009 recession," and that the "natural resources sector has lost 20,000 jobs in six months." Understandably, both employees and employers believe that economic conditions should impact the obligations of notice or severance. Generally speaking, employees feel they should be entitled to increased severance, and employers feel they should pay less in the way of severance. The view of the courts is not entirely settled on this point, and different provinces are headed in different directions.
The law
It is at least clear that the answer to questions three and four above is false. Only just cause entitles an employer to terminate an employee immediately without any notice or severance, and just cause relates to the conduct of the employee. An employer's situation (financial or otherwise) will not be considered when the court assesses whether there is just cause. As for constructive dismissal, this occurs when there is a significant adverse change in an employee's employment that has not been agreed to by the employee. Wage reductions can constitute constructive dismissal. While a general economic downturn and declining revenues are sound business reasons for exercising fiscal restraint, if that restraint includes steps such as reducing wages, a court will not consider an employer's economic circumstances in determining whether or not there has been constructive dismissal. The answers to questions number one and two above, regarding severance amounts and notice periods, are less clear in Alberta. Most of the case law on the issue is from Ontario and British Columbia, and the results are contradictory. British Columbia
In 1985, the British Columbia Court of Appeal held that the lack of available opportunities resulting from a depressed economy may increase the period of notice to be given of termination, but that this must not be given undue emphasis. A few years later the same court revisited the issue and concluded that a poor general employment environment may extend the period of reasonable notice, but the poor economic performance of an employer would not reduce the period of reasonable notice. Twenty-­‐three years later, the British Columbia Court of Appeal reaffirmed that neither adverse economic circumstances generally, nor the poor financial condition of the employer, should decrease the damages to which a wrongfully dismissed employee is entitled. Unfavourable economic circumstances, it seems, should only extend the period of reasonable notice of termination. Ontario The leading 1983 Ontario Court of Appeal decision held that a poor economy generally (scarce jobs) does not increase the notice period, but that a particular employer's poor financial circumstances can decrease the notice period. Two very recent cases out of Ontario demonstrate the significant impact that the application of such a principle can have. In one case, a 52-­‐year-­‐old technician was terminated after 12 years of employment due to a significant shortage of work. The court took into account the market and poor financial health of the employer and reduced the notice period by one third. In the other case, the court emphasized that "the law does not ignore the dilemma of the employer," and due to significantly decreased enrollment in a school, the notice period was reduced by one half. Alberta
In one of the leading and often-­‐cited cases in Alberta, the Court of Appeal refers to "the availability of similar employment," one of the factors cited in an Ontario decision. When assessing the reasonable notice period, the Alberta Court of Appeal looked at the general conditions in the drilling industry at the time of termination and concluded that a positive market was a factor that somewhat decreased the notice period. In the 1980s Alberta went through an oil and gas related recession. A number of decisions from that era addressed the issue of whether the economic circumstances (either the employer specifically, or the broader economy generally) should impact the notice period, and concluded they should. For example, in one case a 45-­‐year-­‐old worker in the oil and gas servicing business was terminated due to the widespread recession. The court held that it "must consider the position of the employer if it is functioning in an unfavourable economic climate." It was satisfied that the employer was undergoing substantial financial losses, concluding that the worker was entitled to eight months' severance where "the economic realities dictated the decision to terminate." Subsequent Alberta cases have questioned whether this is good law in Alberta, and in considering the state of the economy appear to have reduced the notice period in a positive economy. With respect to a particular employer's financial circumstances there are Alberta decisions that indicate an employer's economic state could reduce the notice period, but in order to do so the employer must prove significant economic hardship. In other words, it is not enough to prove that an employer is undergoing financial losses and a decline in profitability; the financial state of the employer must be severe. Conclusions
Alberta courts do recognize that the general state of the economy (and the availability of jobs) is one factor that must be looked at in assessing the notice period. They are also prepared to recognize that an employer's financial circumstances may reduce the amount of severance that the employer has to pay. However, this principle has not been embraced in Alberta in the same way as in Ontario, and Alberta courts require there to be evidence that the employer is undergoing significant financial hardship. Time will tell whether Alberta courts follow the Ontario courts (recent decisions significantly reducing severance in light of an employer's financial plight) or whether they lean towards the British Columbia courts (where an employer's financial plight should not be visited upon the employee). Answers
Question 1: False. Question 2: Likely true in Alberta. Question 3: False. Question 4: False. Gina Ross is a partner at Burnet, Duckworth & Palmer LLP who practices primarily in the area of employment law.