Redress Risk Management (post until May 31/19)
Employment & Labour

Use caution when attempting to cut labour costs

Employers attempting to reduce labour costs must ensure they’re not violating an employment contract or they risk venturing into precarious legal territory, says Toronto employment lawyer and mediator Stuart Rudner.

Failure to abide by the terms of a contract leaves employers open to a constructive dismissal claim or an investigation by the Ministry of Labour, says Rudner, founder of Rudner Law.

“I definitely advise employers to work with an employment lawyer before they implement any changes because there might be other ways to cut costs — or if not, at least we can make sure it’s done in the least risky way possible,” he tells AdvocateDaily.com.

“Our firm sees this all the time, where an employer needs to cut their costs. The key point that we always tell our employer clients is that the employment relationship is based on a legal contract, and you cannot arbitrarily change the terms of a contract,” he says.

The issue of cutting labour costs was highlighted in January, when many franchisees of a coffee shop chain decided to claw back workers’ benefits and other entitlements in response to a $2.40-an-hour increase in Ontario’s minimum wage to $14, leading to protests, the Toronto Star reports.

“Many small businesses, particularly the franchisees, became the poster children for alleged corporate greed because they went about it in a way that was not well received,” Rudner says.

“We also saw the same issue during the economic downturn that started in the late 2000s when many organizations were struggling, revenues were down and they were trying to find ways to reduce costs. 

"Employers will often look at labour costs as being the largest expense.”

The recession may be over, but some companies are still downsizing their workforces once or twice a year to cut costs, Rudner says, even though that means taking a one-time financial hit by paying out severance packages.

Other companies “want everyone to share the pain, so to speak, and instead of cutting their workforce by 15 per cent, they decide to cut everyone’s pay by 15 per cent so that nobody loses their job,” he says.

“That sounds very nice, but as I often tell our employer clients, instead of having a limited number of dismissals to deal with, you’re going to have a potential constructive dismissal claim from every single employee in your organization. So that approach definitely raises some risks.”

Constructive dismissal is defined as “a unilateral and substantial change to a fundamental term of an employment agreement,” he explains. “If the change is agreed upon — and I mean truly agreed upon, not agreed upon under duress — then there would be no potential liability.”

Instead of unilaterally deciding to cut every worker’s pay, a better approach is for the owners or management to meet with all employees in small groups and “convey to everyone that the organization needs to reduce costs and they’re all in this together. It definitely helps if management agrees to take a hit as well,” Rudner says.

“If you get everyone’s buy-in and agreement, it’s a much better position from the perspective of morale and public perception. Anything that’s going to affect an individual in terms of their benefits or compensation has to be agreed upon. The key is communication.”

There are a few areas that employers can look at to reduce their costs without encroaching on an employment agreement, such as controlling overtime, Rudner says. 

“If there is a tremendous amount of overtime being worked, either figure out what the cause is and eliminate it, or control it so that it’s spread out more evenly," he says.

Travel costs can be scaled back dramatically in an age when video-conferencing makes travel unnecessary in many situations, Rudner says, while cutting entertainment costs, such as taking clients to an expensive dinner or a sporting event, are an obvious way to rein in expenses.

While common law drives many of the issues around constructive dismissal, Ontario’s Employment Standards Act covers such things as overtime and minimum vacation entitlement, and employers would be wise not to cut corners in violation of the law, he says.

“There are definitely some employers who are either banking on the fact that the employee doesn’t know any better or is scared to complain for fear of losing their job. But they take a big risk because if anybody complains to the Ministry of Labour, the province will send an inspector and the inspector won’t just look at that one individual who complained,” Rudner says, noting that the government doesn’t need a warrant to search a workplace.

“They will come in and ask to see all of your human resource documents, payroll records, and you’re opening a Pandora’s box because they’re not limited to what they’re investigating at that point. They can now look at every single employee and any potential issue.”

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