Ontario, Canada Court of Appeal Confirms that ESA-Compliant Temporary Layoff Clauses Are Not Termination Clauses

In a significant decision for Ontario employers, the Court of Appeal for Ontario has confirmed that a properly drafted contractual right to impose a temporary layoff in accordance with the Ontario Employment Standards Act, 2000 (ESA) is not a termination provision and is not rendered unenforceable merely because a termination clause in the employment agreement violates the ESA. This decision provides important guidance on the interaction between temporary layoff provisions, constructive dismissal principles, and the Court's landmark decision in Waksdale v. Swegon North America Inc. (Waksdale).

What Happened?

The employee was employed pursuant to a written employment agreement signed in 2013. The agreement contained:

• A for-cause termination provision;
• A without-cause termination provision; and
• A clause allowing the employer to implement a temporary layoff “in accordance with the requirements of the Employment Standards Act, 2000.”

In 2024, the employer experienced financial difficulties. After initially reducing employees' hours, the company placed the employee on a temporary layoff effective April 1, 2024. His benefits continued during the layoff and he was subsequently recalled to full-time employment on September 30, 2024. 

The employee nevertheless commenced a constructive dismissal claim, arguing that the temporary layoff constituted a constructive dismissal and sought 12 months' pay in lieu of notice. 

A key feature of the case was that the employer conceded that the for-cause termination provision in the employment agreement was unenforceable. Under Waksdale, an unenforceable termination clause can invalidate all termination provisions in an employment agreement. The employee argued that the temporary layoff clause should likewise be treated as a termination clause and therefore be struck down, entitling him to treat the layoff as a constructive dismissal. 

The central question before the Court was whether a contractual temporary layoff provision constitutes a "termination clause" for ESA purposes. If it did, the invalidity of the for-cause provision could potentially taint the layoff clause under the reasoning in Waksdale.

The Court's Decision

The Court unanimously dismissed the appeal and held that the temporary layoff clause was not a termination clause. 

The ESA Draws a Clear Distinction Between Temporary Layoffs and Terminations

The Court emphasized that section 56 of the ESA expressly distinguishes between a temporary layoff and a termination of employment. Under section 56(1)(c), a layoff becomes a termination only when it exceeds the statutory limit applicable to the temporary layoff in question. Section 56(4) further states that an employee who is laid off without a specified recall date is not considered terminated unless the layoff exceeds the permitted temporary layoff period. Accordingly, the Court held that a temporary layoff falling within the ESA definition is not a termination. 

Legislative Purpose Favours Employer Flexibility

The Court reviewed the legislative history of Ontario's temporary layoff regime and concluded that the provisions were specifically designed to give employers flexibility during economic downturns while maintaining minimum protections for employees. 

The Court observed that Ontario legislators intended temporary layoffs to serve as a business management tool, distinct from termination, allowing employers to address temporary reductions in work without permanently ending employment relationships. 

Substance Prevails Over Contract Organization

The employee argued that because the temporary layoff clause appeared under a "Termination" heading in the employment agreement, it should be treated as a termination provision. The Court rejected that argument. 

Relying on principles from Waksdale, the Court held that employment agreements must be interpreted as a whole and that headings are not determinative. What matters is the substance of the clause, not where it appears within the contract. 

ESA-Compliant Layoff Clauses Remain Valid

The Court noted that the clause at issue expressly limited any layoff to a "temporary layoff" as defined by and implemented in accordance with the ESA. Because the clause incorporated statutory requirements and did not purport to provide less than ESA minimum standards, it was enforceable. 

The Court declined to characterize a temporary layoff clause as a termination provision when it did not "actually function as a termination clause."

Key Takeaways for Employers

The decision provides welcome clarification for Ontario employers. Since Waksdale, many employment agreements have been challenged on the basis that defects in one termination provision invalidate all clauses relating to the end of employment. This case confirms that not every provision touching on the cessation of the employment relationship will necessarily be treated as a termination clause. 

The ruling is particularly important because, absent a contractual right to lay off employees, a unilateral layoff will generally constitute constructive dismissal at common law. The Court reaffirmed that parties can validly contract for temporary layoffs, provided those provisions comply with the ESA. 

In light of this decision, employers may wish to consider the following:

1. Express temporary layoff language remains important. Employers that wish to preserve the ability to implement temporary layoffs may wish to include a clear contractual right to do so, with an express reference to the ESA and its applicable regulations. 
2. Continue reviewing termination provisions. While this decision protects ESA-compliant temporary layoff clauses, unenforceable termination provisions remain vulnerable to challenge under Waksdale.
3. Do not rely solely on contract headings. Courts will examine the substance and legal effect of a provision rather than its placement within the employment agreement. 
4. Review agreements before economic downturns occur. Temporary layoff rights are most valuable when business conditions deteriorate suddenly. Employers may wish to ensure their agreements are updated, in exchange for valid consideration, before they need to rely on those provisions.