Escalating global trade tensions and sweeping tariffs – such as the retaliatory duties levied across major sectors – have created volatile economic conditions for Canadian businesses. When trade policies affect profits and operating budgets and disrupt supply chains, employers are often forced to reduce operating costs to remain competitive. However, implementing quick payroll reductions without careful legal planning can expose an organization to severe legal liabilities that may prove as costly as the tariffs themselves.

It is critical to understand the legal risks so proactive measures can be implemented to avoid costly litigation.

What Are the Key Employment Law Risks During Economic Uncertainty?

To lower expenses during a trade war, employers often turn to hours reductions, temporary layoffs, or terminations. Each strategy carries distinct legal risks:

• Constructive Dismissal claims: Decreasing compensation, cutting hours, eliminating key duties, or unilaterally changing working conditions can trigger constructive dismissal. A substantial change to an essential term of employment without an employee’s consent allows the employee to treat the relationship as terminated and claim full severance.
• Improper layoffs and unpaid leaves: Many employers assume they can temporarily lay off workers or place them on unpaid leave during economic downturns. Unless temporary layoffs are explicitly permitted in a well-drafted employment agreement, placing an employee on temporary leave – even for tariff-related financial strain – is generally prohibited and constitutes constructive dismissal.
• Lack of legislative “free passes”: During the COVID-19 pandemic, the government implemented regulations like the Infectious Disease Emergency Leave (IDEL) to temporarily protect employers from constructive dismissal claims for pandemic-related hours reductions. These protections do not exist for trade-war disruptions.
• Enforceability of termination clauses: Unenforceable termination clauses default to common-law reasonable notice. Eight weeks of total compensation could turn into eight months or more for long-serving employees. Courts scrutinize these clauses for language that conflicts with statutory standards, which can nullify the agreement. As  Wigdor v. Facebook Canada Ltd., 2026 ONCA 572 recently demonstrated again.

How Can Employers Protect Their Business During Economic Uncertainty?

Employers can navigate tariff-driven economic uncertainty and litigation risk through a structured approach:

• Review and update employment contracts: Ensure existing contracts contain clear terms regarding job modifications or temporary layoffs. Ensure termination clauses are properly drafted and enforceable to cap severance liabilities at statutory minimums where appropriate.
• Provide adequate working notice: If you must alter compensation, hours, or roles, negotiate the changes with clear written notice or offer fresh consideration (such as a signing bonus or enhanced benefits) in exchange for agreed-upon changes to employment terms.
• Standardize operational protocols: Ensure all organizational restructurings, role consolidations, or workforce reductions are transparent, documented, and executed with legal guidance rather than forced as ultimatums.

Speak to Experienced Legal Counsel

Navigating trade-related economic disruption requires a balanced approach. Employers should balance financial agility and legal compliance. Carefully updating contracts and planning restructurings helps prevent costly legal claims.