With looming economic slump, employment lawyers advising clients on cost-cutting personnel changes

With all signs pointing to an economic downturn, employers are asking about cost-cutting options, the market for distressed M&A is gearing up, and litigators are up against a backed-up court system, worsened by judicial vacancies, said lawyers in a recent Dentons roundtable.

On Thursday morning, the firm assembled lawyers from several different practice groups to discuss how the looming economic slump is steering trends in their work. There were two roundtable discussions. The first covered the latest in the M&A, corporate, securities, and banking and finance practices. The second featured lawyers in the restructuring and insolvency, litigation, and employment law groups.

In the last few months, some industries, including construction, have been “booming” and businesses are struggling to hire, said Meaghen Russell, a partner in the firm’s employment and labour group. In others, such as retail, consulting, and marketing and advertising, there has been some downsizing. But in terms of the restructuring that she has advised on this year, it is nowhere near the scale that occurred during COVID’s mass terminations, she said.

Russell is advising clients on what they need to keep in mind if they plan to venture into payroll and headcount reductions. One issue is temporary layoffs. Under the Employment Standards Act, employers can lay off workers for up to 13 weeks within a 20-week period, or for up to 35 weeks in a 52-week period if the employer meets certain criteria. But during COVID, employers sought to use their temporary layoff right without reserving the right to do so in their employment contracts, and this led to a flood of constructive dismissal claims.

“In having these discussions with clients, we are saying, if you're going to be looking at temporary layoffs as a potential cost savings, you need to look to see you have other documentation where you have reserved the right to utilize that section of the Employment Standards Act,” she said.

Russell also raised the issue of salary reductions and noted that the environment has shifted since the pandemic hit and this was a widespread cost-saving measure. When employers cut compensation across the board, employees generally were not resistant because they were in a global crisis and focused on keeping their jobs.

“Moving forward, if employers are going to utilize this type of strategy in terms of reducing compensation, I think we can expect to see pushback from employees,” she said. “Given that the context is now a downturn in the economy.”

Because there has also been a shift away from remote work as a necessity, many employers are trying to get their employees back into the office. Unless remote work is a clear term in the employment agreement, management has every right to mandate a return to the office, said Russell. If there is a provision in the contract, the employer must provide advance notice of a return-to-work policy, and the length of that notice will depend on several factors, including the language of the agreement, she said.

“I would also add to that, you know, six-to-nine months ago, a lot of companies started with encouraging a return to work in and around one-day-, two-day-, three-days-a-week. Some clients have seen that that encouragement – holding events at the workplace, trying to incentivize folks to come back – hasn't led to the in-office attendance that they hopeful for.”

With the economic downturn, Marina Sampson adds that employers may have the leverage and the will to be stricter with return-to-office mandates. “I don't think, legally, there, they've got an issue,” she said. “It was more or less a retention-flexibility analysis.”

Sampson is a partner in Dentons’ litigation and alternative dispute resolution group. In a discussion on litigation trends, she referenced a recent Globe and Mail report that found nearly nine-percent of federally appointed judicial positions are vacant – 88 out of the 995 positions for full-time judges. The article noted that the pandemic case backlog, dearth in prosecutors, and an increase in “serious complex files” is intensifying the impact of the shortage.

“What we're seeing is increased arbitration as a result,” said Sampson.

With more arbitration comes litigation over arbitration clauses. In 2020, the Supreme Court of Canada ruled in Uber Technologies Inc. v. Heller that Uber’s arbitration clause was unconscionable. It required arbitration to occur in the Netherlands and involved a US$14,500 filing fee. Sampson said that parties are continuing to litigate these issues regularly.

“Uber was kind of an exceptionally unfriendly clause,” she said. “But a lot of plaintiffs continue to invoke Uber to have even more far more consumer-friendly clauses overturned.”

While there is no shortage of litigation, clients often lack the budget for it, and Meredith Bacal said the market for litigation funding is active. Bacal is a senior associate in Dentons’ intellectual property, and litigation and dispute resolution groups. The decelerating economy has also diminished the number of trademark and patent filings, as clients spend less on R&D and focus on their core assets and brands, she said.

Because of the government stimulus aimed at keeping businesses alive during the pandemic, the last few years have been quiet in the insolvency space, said Robert Kennedy, national co-leader of the restructuring, insolvency and bankruptcy group at Dentons. But he is beginning to get more calls about how to deal with the interest rate hikes and the liquidity issues with which businesses are now contending. He is also getting more calls from debtors to discuss strategies to increase profitability and deal with the demands of company stakeholders, and vendors are considering next steps in their relationship with liquidity-strapped companies.

Because in this situation lenders tend to try and monetize some of their collateral through CCAA filings, receiverships, or other sales, Kennedy predicts a rise in distressed M&A over the next year or so.

“In short, I think there will be a rise in filings to protect the business itself and maintain value for vendors – certainly to maintain and keep jobs,” he said.