If your Canadian business clients face tough times after a protracted U.S./Canada trade war, and they plan to lay off some of their workforce as a result, even if temporarily, expect to see a new exposure to Employment Practices Liability (EPL) insurance in Canada.

Mintz employment lawyers Patrick Denroche and Brad Tartick warned of the potential EPL insurance exposure of corporate layoffs in a Mondaq article published Thursday.

Dismissing employees is a potential strategy for handling financial losses suffered as a consequence of tariffs imposed on Canadian goods exported to the U.S., the authors write. But clients need to do this correctly if they don’t want to face wrongful dismissal lawsuits.

At the time Denroche and Tartick published their article, U.S. President Donald Trump had imposed a general 25% tariff on all Canadian goods, but that tariff has since been modified to exclude all goods covered under the USMCSA trade agreement.

The U.S. implemented a 25% tariff on Canadian steel and aluminum Wednesday. Canada retaliated with a 25% tariff on $16-billion worth of U.S. steel and aluminum products, as well as on more than $12 billion of other U.S. goods. Trump is threatening further counter-tariffs on Apr. 2. Whether anything materializes from that threat remains to be seen.

“Canadian governments at all levels are preparing relief programs for local businesses, but these may not mitigate the potentially material adverse effects on the Canadian economy,” the authors say of the escalating trade war.

“Employers may look to change the terms and conditions of employment for existing employees, which could include reductions or other adjustments to compensation, reassignments of roles and responsibilities, modified reporting relationships, moving employees to different workplace locations, and so on. However, employers must be careful to avoid triggering a constructive dismissal when making these changes.”

Constructive dismissal is the basis for a specific type of employment-related lawsuit launched against business directors, and is typically covered under an EPL insurance policy, as noted in a 2014 paper by employment lawyers Eric Dolden and Shelley Armstrong.

“A constructive dismissal occurs when the employer makes a significant, unilateral, and adverse change to one or more fundamental terms or conditions of employment without the employee’s consent,” Denroche and Tartick write on Mondaq. “An employee who successfully claims constructive dismissal is typically entitled to damages as if their employment had been wrongfully terminated, including common law entitlements.”

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Commercial insurance brokers and carriers offering EPL coverage will want to advise their clients how to reduce their risk of exposure to these types of lawsuits.

Denroche and Tartick say employers “can substantially mitigate constructive dismissal risk by securing the employee’s consent to the change, or by providing sufficient advance notice of the change. Before proceeding, employers should consider whether a change or combination of changes creates constructive dismissal risk and, if so, consider ways to mitigate that risk.”

As of 2016, EPL coverage was a hot commodity in Canada, having been introduced in North America in 1998 as a form of insurance coverage distinct from directors and officers insurance.

A decade ago, “the most common EPL claim in Canada [was] for wrongful dismissal, including emotional distress and mental anguish arising from dismissal,” Chris Rebchuk, who was then a corporate risk underwriter at Insurance Company of North America, wrote in CU at the time.

Most recently, sexual harassment lawsuits have became a more common and publicized form of EPL claims.

In a 2014, Dolden and Armstrong noted the severity of EPL claims tended to be lower in Canada because cases were decided in tribunals, compared with the U.S., where EPL claims were often decided by juries in a courtroom. As a result, awards to claimants tended to be up to $25,000, and rarely above, Dolden and Armstrong wrote, citing a study of decisions at the time.

 

Feature image courtesy of iStock.com/skynesher