Revised Contracts in the Time of COVID-19
One of the common issues I've been seeing pop up - I've dealt with it a number of times in recent days - is employers asking employees to sign new employment contracts with reduced compensation and/or hours.
There are a bunch of different variations of this: Some expressly threaten a full layoff if you don't sign; some impliedly threaten it. Some are reducing compensation for 'furloughed' employees to just equal the amount of the subsidy available from CEWS; some are reducing compensation for actively employed workers.
But let's talk for a minute about these in general terms.
Earlier in the pandemic, I posted a commentary that employers may be liable for constructive dismissal if they send their workers home without pay. There's really an open question as whether or not some employers might get relief against that doctrine because of the extraordinary nature of the pandemic (we call it 'frustration of contract'), and if so, what employers would get that relief. But, as a legitimate question, the simple reality is that we don't know how that's going to play out. And when I say we, I'm talking about everyone - me, other lawyers, employers. This is a known unknown, but it basically means that employers know that they might get sued in constructive dismissal if they lay off their workers or make unilateral changes to their contracts or compensation.
Some of the contracts include an express waiver of any right to sue in constructive dismissal. In my view, this is unnecessary: If the contract is otherwise enforceable in the first place, the fact of employee consent to the change is enough to defang any constructive dismissal action. If it isn't, the release language is likely to be even weaker than the 'consent' in the first place.
But this is an important thing for employees to understand: You may well have live rights of action in respect of any unilateral actions your employer may take. If you sign, you may compromise those rights of action. That is, 100%, the point. That's why your employer wants you to sign.
So the threat, express or not, is usually that the employer will lay you off altogether if you don't sign. And that's probably a significant threat.
Whether they're talking about putting you on a "furlough" and paying you up to $847 a week, or reducing your hours and pay substantially, both of those options are likely to seem a lot better than the $500 per week you'd get from CERB, right?
However, step into the employer's shoes for a moment.
The CEWS Example
Let's suppose, for the sake of argument, that you normally make $1000 per week, and your CEWS-eligible employer wants to put you on a furlough and pay you $750 per week. The significance of that figure is that it's the CEWS subsidy they could get for you. In other words, whether your employer puts you on a 75%-paid furlough or lays you off altogether, the employer is paying you all of nothing out of its own pocket. (Okay, under CEWS the employer pays you up front then gets reimbursed by the government. But ultimately they're not on the hook for any of your compensation through the furlough.)
(To be clear, this example covers a narrow, albeit common, class of scenarios, where the employer is eligible for CEWS, and doesn't want to keep the employee in the workplace.)
The only difference for the employer between a CEWS-funded furlough and a layoff is this: If they unilaterally cut your pay to 75%, and you sue them successfully in constructive dismissal, they may have to pay you the remaining 25% of your compensation over a period of time, up to (at most) the time of the furlough. By contrast, if they unilaterally cut your pay to zero, and you end up collecting CERB instead, and you successfully sue in constructive dismissal, their liability to you would be four times higher. Oh, and there's another difference, too: If they lay you off, they can require absolutely nothing of you until they recall you, and you owe no obligation to provide them notice if you, say, find another job and/or decide not to go back. If they just 'furlough' you with pay, you're still an employee, with all of the duties and obligations that entails.
In other words, for both the CEWS-eligible employer and the employee whose services aren't required, in most cases they'll be objectively better off going down the furlough/CEWS route than through a total layoff.
So, faced with the option of paying you nothing and you getting (in this example) $750 per week, or paying you nothing and you getting only CERB benefits, there is only one conceivable reason why an employer would act against its own interests and put you into the worse position:
Malice.
If you refuse to sign, they can make things much worse for you by refusing to pay you your government-subsidized wages, even though paying you would not be a net cost to them, and even though NOT paying you actually aggravates the liabilities they're trying to avoid.
So call it spite, malice, making an example out of you, whatever. However, employers should note that taking deliberate action with the express goal of exacerbating an employee's financial hardship is generally a bad idea.
The Reduced Hours Example
Let's take CEWS and furloughs out of the equation: Let's talk about an employer who wants to reduce an employee's hours and compensation proportionally.
It's fundamentally a similar analysis: Though, in this case, the wages may well be coming out of the employer's own pocket, the corollary is that it's getting labour of value in return for it. And they're basically acknowledging that they have the labour for you to perform. (This is important, in part, because it makes it less likely that they'd be able to claim that the contract was frustrated.)
So if they're asking for your permission to cut your hours and pay, on the threat that they'll cut your hours and pay by a greater degree if you don't give permission...again, why would they do such a thing? If they thought they were entitled to lay you off altogether, why would they need you to agree to such a reduction?
They know full well that, if they would have liability for cutting your hours and wages, their liability would be higher for laying you off altogether, and they wouldn't be getting your labour in exchange.
The trend is similar: It smells like a bluff. To take action based on a refusal to sign would be against the employer's self-interest. Not to say that no employers will do it. But they'd be ill-advised to do so.
All of that being said, many employees are going to want to sign these anyways. The threat of a layoff, bluff or not, is too significant for an employee to ignore.
One of the things I've been seeing consistently is the absence of any commitment to return to the status quo at the end of the crisis. Employers may justify this on the basis that they don't know when it will end, and they don't know what their business will look like when it ends.
And that, folks, is exactly what employees need to be worried about. These new contracts are being pitched as 'temporary'. A new rate of compensation because of the COVID-19 crisis, on the expectation and understanding that it's just a temporary thing. But we're not going to put anything like that into the contract, because if things aren't all sunshine and lollipops at the end of COVID-19, we want to have the right to keep you on that reduced compensation.
See the problem?
If you sign a contract that indefinitely reduces your compensation, and the employer later goes and dismisses you from employment before reinstating you to your previous level, any termination entitlements you may receive at that point will be calculated in accordance with the new contract. Just because the threat is that they'll lay you off and/or dismiss you permanently if you don't sign, doesn't mean those things won't happen if you do sign.
And given the economic forecasts, many of these furloughs, temporary layoffs, and other staff reductions may turn into permanent dismissals.
Likewise, even if the employer keeps you on, why would they increase your wages back to their previous levels if they don't have to? With the economy in the tank, and unemployment going through the roof, employees aren't going to have a lot of bargaining power in terms of demanding their wages return to their previous level. With no contractual right to it, the only threat employees will have the threat of voluntary resignation - which, for employers looking to reduce their payrolls, may actually be a win in many contexts.
One of the things for employees to consider, then, is asking for language that makes the contract expressly temporary. It's an eminently reasonable request: Basically, the employee is giving the employer what they want - the right to reduce compensation for a period of time without risking liability. But the goal is to preserve the status quo, so that at the end of the period, if there's still some reason to look at extending the reduction, the employer is then in a position where they either need to ask again, or else do it unilaterally and risk constructive dismissal liability at that time.
And if the employer is taking the position that they'd rather fully lay you off than reduce your compensation on a temporary basis, it's worth asking why.
The impact of these contracts is questionable, and enforceability will depend heavily on the specific language.
The fact of consent may or may not be enough to get an employer out of any constructive dismissal liabilities. This is something we've never seen on any scale before, but there's a reasonable argument to be made that an employer telling an employee (expressly or impliedly) "Accept this pay cut or we'll lay you off", if it has the contractual right to do neither, would itself be a repudiation of the contract, meaning that the employee may be entitled to take the position that a constructive dismissal has occurred even prior to the pay cut.
Any 'release' language is likely to have challenges, and even relying on the new wage rate in subsequent wrongful dismissal litigation may be doubtful. And to the extent of representations that the new wage rate is temporary, given various (and evolving) good faith obligations owed by employers, the employer is likely to find itself in a very precarious position if it tries to rely too heavily on the letter of the contract.
And the worst part? By ostensibly giving the employee the option, the employer very likely loses any ability to argue that the contract was 'frustrated' in the first place.
There's a further kicker: It probably doesn't even matter to employer liabilities, in most cases.
Take the above example of an individual getting reduced to his or her CEWS subsidy of $750 per week. Suppose that this goes on for 12 weeks. If the employee gets brought back to full income after those 12 weeks, that employee has lost $3000 of gross income. Most employees are very unlikely to sue their current employers over that: Even aside from the cost and challenge of going to Provincial Court, it also threatens your ongoing employment relationship. So that becomes a very manageable risk for the employer.
On the other hand, if the employer decides to terminate the employment relationship at the end of those 12 weeks, then the employee won't even want to characterize the original reduction as a constructive dismissal...because if it was, then the notice period starts running at the start of the reduction, and the employer gets credit for the $9000 in CEWS-subsidized wages it paid to the employee.
And finally, there may be a question as to what happens to any other contracts governing the employment relationship. Again, it depends on the specific language of the contract, but given the speed at which these contracts are being implemented for large numbers of employees, there's a real risk of something getting missed in terms of integrating existing contractual rights and obligations.
I was arguing for a program like CEWS since the very start of this crisis. In my first pandemic blog entry (March 12), I argued that a substantial subsidy was necessary. In the same timeframe, I was Tweeting about it, too (for instance, here and here).
The point, from my perspective, was to facilitate an income replacement mechanism for displaced workers that would actually be run through payroll, and therefore would preserve the employment relationship and insulate the employer against furlough-related liabilities. (Other government income replacement benefits, like EI, don't actually reduce employer liability: If I get laid off, collect EI, then sue my employer for the dismissal, my employer pays full damages not reduced by EI benefits, and EI gets paid back.) To be clear, CEWS is a program that significantly benefits both employers and employees.
By using the government subsidy to leverage contractual concessions from employees, on threat of declining a substantial government subsidy, breaching the employment contract, and forcing the employees to accept far inferior government benefits, employers are perverting the purposes of CEWS. It's the kind of thing that may well see further legislative intervention in these unsteady times, and that courts will likely frown upon if such an issue ends up before them.
To be fair, not all employers adopting such a strategy are trying to be the bad guy. Things are moving quickly, and not all the angles are being considered. They don't want to enter into a temporary contract because they don't know how long this will last, they don't know where they'll stand afterward, and they don't want to make long-term commitments - but they likely don't realize that they're effectively asking for a long-term commitment from the employee (which employees are, if anything, worse positioned to provide), and that these contracts, more often than not, actually make no commitments whatsoever on the part of the employer.
Furthermore, wanting to do it on a mutual basis (getting employee consent) may seem like the 'good faith' thing to do. Many employers think that they're actually allowed to implement layoffs (though, in non-union contexts, that is usually not the case), and so offering this arrangement instead seems like a generous proposal, instead of the brutal threat it actually turns out to be.
This is a case for unilateral action. When you're attempting to create a choice for the employee between 'bad' and 'worse', that's really a false choice (which is, after all, the point), and one that creates all sorts of risks and uncertainties. If you really need to cut the employee's wages for the survival of the business, then do so on a unilateral basis. If the employees feel that they have remedies worth pursuing, cross that bridge when you come to it. The reality is this: If I were in court on the employer side, and had a choice between being able to say "We had to cut wages to survive in extraordinary circumstances, but we did what we could to minimize the impact on the employees" or "Look at this contract we coerced the employee into signing"...my expectation is that the former would yield a more favourable result.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
There are a bunch of different variations of this: Some expressly threaten a full layoff if you don't sign; some impliedly threaten it. Some are reducing compensation for 'furloughed' employees to just equal the amount of the subsidy available from CEWS; some are reducing compensation for actively employed workers.
But let's talk for a minute about these in general terms.
Why Do Employers Want Employees to Sign?
Earlier in the pandemic, I posted a commentary that employers may be liable for constructive dismissal if they send their workers home without pay. There's really an open question as whether or not some employers might get relief against that doctrine because of the extraordinary nature of the pandemic (we call it 'frustration of contract'), and if so, what employers would get that relief. But, as a legitimate question, the simple reality is that we don't know how that's going to play out. And when I say we, I'm talking about everyone - me, other lawyers, employers. This is a known unknown, but it basically means that employers know that they might get sued in constructive dismissal if they lay off their workers or make unilateral changes to their contracts or compensation.
Some of the contracts include an express waiver of any right to sue in constructive dismissal. In my view, this is unnecessary: If the contract is otherwise enforceable in the first place, the fact of employee consent to the change is enough to defang any constructive dismissal action. If it isn't, the release language is likely to be even weaker than the 'consent' in the first place.
But this is an important thing for employees to understand: You may well have live rights of action in respect of any unilateral actions your employer may take. If you sign, you may compromise those rights of action. That is, 100%, the point. That's why your employer wants you to sign.
What If the Employee Doesn't Sign?
So the threat, express or not, is usually that the employer will lay you off altogether if you don't sign. And that's probably a significant threat.
Whether they're talking about putting you on a "furlough" and paying you up to $847 a week, or reducing your hours and pay substantially, both of those options are likely to seem a lot better than the $500 per week you'd get from CERB, right?
However, step into the employer's shoes for a moment.
The CEWS Example
Let's suppose, for the sake of argument, that you normally make $1000 per week, and your CEWS-eligible employer wants to put you on a furlough and pay you $750 per week. The significance of that figure is that it's the CEWS subsidy they could get for you. In other words, whether your employer puts you on a 75%-paid furlough or lays you off altogether, the employer is paying you all of nothing out of its own pocket. (Okay, under CEWS the employer pays you up front then gets reimbursed by the government. But ultimately they're not on the hook for any of your compensation through the furlough.)
(To be clear, this example covers a narrow, albeit common, class of scenarios, where the employer is eligible for CEWS, and doesn't want to keep the employee in the workplace.)
The only difference for the employer between a CEWS-funded furlough and a layoff is this: If they unilaterally cut your pay to 75%, and you sue them successfully in constructive dismissal, they may have to pay you the remaining 25% of your compensation over a period of time, up to (at most) the time of the furlough. By contrast, if they unilaterally cut your pay to zero, and you end up collecting CERB instead, and you successfully sue in constructive dismissal, their liability to you would be four times higher. Oh, and there's another difference, too: If they lay you off, they can require absolutely nothing of you until they recall you, and you owe no obligation to provide them notice if you, say, find another job and/or decide not to go back. If they just 'furlough' you with pay, you're still an employee, with all of the duties and obligations that entails.
In other words, for both the CEWS-eligible employer and the employee whose services aren't required, in most cases they'll be objectively better off going down the furlough/CEWS route than through a total layoff.
So, faced with the option of paying you nothing and you getting (in this example) $750 per week, or paying you nothing and you getting only CERB benefits, there is only one conceivable reason why an employer would act against its own interests and put you into the worse position:
Malice.
If you refuse to sign, they can make things much worse for you by refusing to pay you your government-subsidized wages, even though paying you would not be a net cost to them, and even though NOT paying you actually aggravates the liabilities they're trying to avoid.
So call it spite, malice, making an example out of you, whatever. However, employers should note that taking deliberate action with the express goal of exacerbating an employee's financial hardship is generally a bad idea.
The Reduced Hours Example
Let's take CEWS and furloughs out of the equation: Let's talk about an employer who wants to reduce an employee's hours and compensation proportionally.
It's fundamentally a similar analysis: Though, in this case, the wages may well be coming out of the employer's own pocket, the corollary is that it's getting labour of value in return for it. And they're basically acknowledging that they have the labour for you to perform. (This is important, in part, because it makes it less likely that they'd be able to claim that the contract was frustrated.)
So if they're asking for your permission to cut your hours and pay, on the threat that they'll cut your hours and pay by a greater degree if you don't give permission...again, why would they do such a thing? If they thought they were entitled to lay you off altogether, why would they need you to agree to such a reduction?
They know full well that, if they would have liability for cutting your hours and wages, their liability would be higher for laying you off altogether, and they wouldn't be getting your labour in exchange.
The trend is similar: It smells like a bluff. To take action based on a refusal to sign would be against the employer's self-interest. Not to say that no employers will do it. But they'd be ill-advised to do so.
What To Look For
All of that being said, many employees are going to want to sign these anyways. The threat of a layoff, bluff or not, is too significant for an employee to ignore.
One of the things I've been seeing consistently is the absence of any commitment to return to the status quo at the end of the crisis. Employers may justify this on the basis that they don't know when it will end, and they don't know what their business will look like when it ends.
And that, folks, is exactly what employees need to be worried about. These new contracts are being pitched as 'temporary'. A new rate of compensation because of the COVID-19 crisis, on the expectation and understanding that it's just a temporary thing. But we're not going to put anything like that into the contract, because if things aren't all sunshine and lollipops at the end of COVID-19, we want to have the right to keep you on that reduced compensation.
See the problem?
If you sign a contract that indefinitely reduces your compensation, and the employer later goes and dismisses you from employment before reinstating you to your previous level, any termination entitlements you may receive at that point will be calculated in accordance with the new contract. Just because the threat is that they'll lay you off and/or dismiss you permanently if you don't sign, doesn't mean those things won't happen if you do sign.
And given the economic forecasts, many of these furloughs, temporary layoffs, and other staff reductions may turn into permanent dismissals.
Likewise, even if the employer keeps you on, why would they increase your wages back to their previous levels if they don't have to? With the economy in the tank, and unemployment going through the roof, employees aren't going to have a lot of bargaining power in terms of demanding their wages return to their previous level. With no contractual right to it, the only threat employees will have the threat of voluntary resignation - which, for employers looking to reduce their payrolls, may actually be a win in many contexts.
One of the things for employees to consider, then, is asking for language that makes the contract expressly temporary. It's an eminently reasonable request: Basically, the employee is giving the employer what they want - the right to reduce compensation for a period of time without risking liability. But the goal is to preserve the status quo, so that at the end of the period, if there's still some reason to look at extending the reduction, the employer is then in a position where they either need to ask again, or else do it unilaterally and risk constructive dismissal liability at that time.
And if the employer is taking the position that they'd rather fully lay you off than reduce your compensation on a temporary basis, it's worth asking why.
What Do These Contracts Even Do?
The impact of these contracts is questionable, and enforceability will depend heavily on the specific language.
The fact of consent may or may not be enough to get an employer out of any constructive dismissal liabilities. This is something we've never seen on any scale before, but there's a reasonable argument to be made that an employer telling an employee (expressly or impliedly) "Accept this pay cut or we'll lay you off", if it has the contractual right to do neither, would itself be a repudiation of the contract, meaning that the employee may be entitled to take the position that a constructive dismissal has occurred even prior to the pay cut.
Any 'release' language is likely to have challenges, and even relying on the new wage rate in subsequent wrongful dismissal litigation may be doubtful. And to the extent of representations that the new wage rate is temporary, given various (and evolving) good faith obligations owed by employers, the employer is likely to find itself in a very precarious position if it tries to rely too heavily on the letter of the contract.
And the worst part? By ostensibly giving the employee the option, the employer very likely loses any ability to argue that the contract was 'frustrated' in the first place.
There's a further kicker: It probably doesn't even matter to employer liabilities, in most cases.
Take the above example of an individual getting reduced to his or her CEWS subsidy of $750 per week. Suppose that this goes on for 12 weeks. If the employee gets brought back to full income after those 12 weeks, that employee has lost $3000 of gross income. Most employees are very unlikely to sue their current employers over that: Even aside from the cost and challenge of going to Provincial Court, it also threatens your ongoing employment relationship. So that becomes a very manageable risk for the employer.
On the other hand, if the employer decides to terminate the employment relationship at the end of those 12 weeks, then the employee won't even want to characterize the original reduction as a constructive dismissal...because if it was, then the notice period starts running at the start of the reduction, and the employer gets credit for the $9000 in CEWS-subsidized wages it paid to the employee.
And finally, there may be a question as to what happens to any other contracts governing the employment relationship. Again, it depends on the specific language of the contract, but given the speed at which these contracts are being implemented for large numbers of employees, there's a real risk of something getting missed in terms of integrating existing contractual rights and obligations.
This Isn't What CEWS Was Designed For
I was arguing for a program like CEWS since the very start of this crisis. In my first pandemic blog entry (March 12), I argued that a substantial subsidy was necessary. In the same timeframe, I was Tweeting about it, too (for instance, here and here).
The point, from my perspective, was to facilitate an income replacement mechanism for displaced workers that would actually be run through payroll, and therefore would preserve the employment relationship and insulate the employer against furlough-related liabilities. (Other government income replacement benefits, like EI, don't actually reduce employer liability: If I get laid off, collect EI, then sue my employer for the dismissal, my employer pays full damages not reduced by EI benefits, and EI gets paid back.) To be clear, CEWS is a program that significantly benefits both employers and employees.
By using the government subsidy to leverage contractual concessions from employees, on threat of declining a substantial government subsidy, breaching the employment contract, and forcing the employees to accept far inferior government benefits, employers are perverting the purposes of CEWS. It's the kind of thing that may well see further legislative intervention in these unsteady times, and that courts will likely frown upon if such an issue ends up before them.
So What Do We Do Instead?
To be fair, not all employers adopting such a strategy are trying to be the bad guy. Things are moving quickly, and not all the angles are being considered. They don't want to enter into a temporary contract because they don't know how long this will last, they don't know where they'll stand afterward, and they don't want to make long-term commitments - but they likely don't realize that they're effectively asking for a long-term commitment from the employee (which employees are, if anything, worse positioned to provide), and that these contracts, more often than not, actually make no commitments whatsoever on the part of the employer.
Furthermore, wanting to do it on a mutual basis (getting employee consent) may seem like the 'good faith' thing to do. Many employers think that they're actually allowed to implement layoffs (though, in non-union contexts, that is usually not the case), and so offering this arrangement instead seems like a generous proposal, instead of the brutal threat it actually turns out to be.
This is a case for unilateral action. When you're attempting to create a choice for the employee between 'bad' and 'worse', that's really a false choice (which is, after all, the point), and one that creates all sorts of risks and uncertainties. If you really need to cut the employee's wages for the survival of the business, then do so on a unilateral basis. If the employees feel that they have remedies worth pursuing, cross that bridge when you come to it. The reality is this: If I were in court on the employer side, and had a choice between being able to say "We had to cut wages to survive in extraordinary circumstances, but we did what we could to minimize the impact on the employees" or "Look at this contract we coerced the employee into signing"...my expectation is that the former would yield a more favourable result.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
Comments
Post a Comment