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A cautionary tale of terminations for employers in the COVID era

The pandemic has affected almost every aspect of life and turned the employer-employee relationship into a roller coaster.
michael-kilgallin

The pandemic has affected almost every aspect of life and turned the employer-employee relationship into a roller coaster.

In order to comply with health/safety orders, adapt to reduced demands, pivot from eliminated options and try to survive, many employment relationships have changed dramatically, and unfortunately, resulted in undesired terminations.

Many employers felt relatively helpless in remaining financially viable and were forced to terminate employees in an effort to weather the pandemic storm. This attracted the question: Was this truly the employer’s decision to terminate or was the termination caused by something beyond its control that amounted to frustration of contract?

Canadian courts have held that “frustration of contract” occurs when, without the fault of either party, a contractual obligation has become incapable of being performed because the existing circumstances render it a thing radically different from that which was undertaken by the contract. If a COVID-based termination was frustration of contract, then it would not be a regular without -cause termination triggering notice or pay in lieu of notice (severance pay).

This question was recently answered by the BC Supreme Court in Verigen vs. Ensemble Travel Ltd., 2021 BCSC 1934.

The employer operated in the travel industry, which was decimated by the pandemic. After a series of extended temporary layoffs over a five-month period (March to August 2020), the employer terminated a number of employees. One of those employees brought a wrongful dismissal claim seeking common law reasonable notice, above the two weeks entitlement she was provided under the Employment Standards Act (ESA).

At court, the employer argued that the employment contract was frustrated by the collapse of the travel industry and the reality that the employee could not perform her role, which required up to 50% of her time travelling for work. After reviewing the case law on frustration of contract, the court concluded that it did not apply to these facts, because “… the collapse in the travel market goes to [the employer’s] ‘ability to perform’ [the contract], rather than ‘the nature of the obligation itself.’”

Of note, there still was some business for the employer, about half of its staff were working, and the reduced demand was not expected to be permanent. Finally, the court adopted the finding that a “… lack of adequate funds will not generally justify a finding of frustration.”

The decision also addressed a number of other important points. First, because the employee agreed to a temporary layoff and some extensions (which was not a term in her employment agreement), the termination did not occur until she was expressly terminated. The court warned that the result may not have been the same if the employer was using the temporary layoffs and extensions in bad faith (e.g. knowing they would be permanent but wanting to delay the termination liability).

Second, the employer’s handbook restricting the employee’s without-cause termination entitlement to ESA minimums only was not enforceable because the handbook was not given to her to review and sign until months after she started working, without any new/fresh consideration.

Third, even though she was a short service employee (18 months total) in her 50s, she was awarded five months’ notice. While there are many B.C. cases that indicate a three-month starting default for short service employees, in this case she was still looking for work for more than a year after her termination, which largely led to the additional two months.

Fourth, there was no reduction to her severance pay, despite the fact the employees who were not terminated had their wages reduced by 20% during her notice period. The court found that percentage would likely trigger constructive dismissal, and employees choosing to keep working at the reduced wage were distinguishable from terminated employees who did not have that choice.

Fifth, the court did not have to address whether the Canada Emergency Response Benefit (CERB) payments received by the employee were deductible, because they did not overlap with her five-month notice period.

However, at least two other B.C. cases have found the CERB is deductible: Hogan vs. 1187938 B.C. Ltd., 2021 BCSC 1021 and Yates vs. Langley Motor Sport Centre Ltd., 2021 BCSC 2175.

Employer takeaways:

•While the frustration argument was not accepted in this case, it is still a possible argument for other employers who had even less control over their circumstances and can show the employment relationship has become radically different from that which was undertaken.

•Pandemic or non-pandemic, the best way for employers to reduce their exposure for without-cause terminations is through enforceable termination provisions that either restrict entitlement to ESA or some other predicable and manageable formula above the ESA.

•Important terms of employment, such as express termination provisions, will not be enforceable if introduced after the employment relationship begins, unless there is new/fresh consideration and acceptance by the employee or sufficient notice of the new terms of employment.

•Adding the right to temporarily lay off employees should be included in all new employment agreements and, if possible, added to existing ones. That said, temporary layoffs that exceed the ESA maximums, normally 13 weeks within a 20-week period, are deemed a termination under the ESA.

While every effort has been made to ensure accuracy in this article, you are urged to seek specific advice on matters of concern and not to rely solely on what is contained herein. The article is for general information purposes only and does not constitute legal advice. •

Michael Kilgallin is a partner at Roper Greyell, where he provides advice to employers on employment, labour relations and human rights issues in the workplace.