Laying off managers? Here's what you need to know

Managers are on the chopping block. At least, that’s what it seems, based on recent restructuring moves by several large organizations in Canada and elsewhere. 

Just in the past few weeks, Air Canada has cut 400 management positions — about one per cent of its total workforce — Canada Post announced that it’s eliminating management roles as part of restructuring to transform its business model, and Bell Canada removed approximately 700 employees, mostly managers. In the U.S., Target is cutting 1,800 corporate positions including management, accounting for eight per cent of its global headquarters team. 

Is targeting management rather than frontline workers an effective strategy for organizations wanting to trim costs, or does it heighten legal risk?  

Terminating the employment of management-level employees does carry certain increased risks — the nature of management positions, increased contractual complexity, and a greater involvement of managers with internal processes and company information could all lead to complications and greater liability, according to one expert.

Termination entitlements for managers

When it comes to terminating managers rather than frontline employees, the statutory protections are similar, according to Chris Pelkey, an employment lawyer at McInnes Cooper in Fredericton, NB.

“Under employment standards legislation, there are some exceptions for management employees but they're normally related to hours of work or overtime pay, and they typically aren't going to be a huge issue when it when it comes time to terminate,” says Pelkey. 

However, there's one notable exception for federally regulated employers that works even more in the employer’s favour.

“Under the Canada Labour Code, there are unjust dismissal protections that give certain employees the right to bring an unjust dismissal claim before a regulatory body where the employer doesn't have just cause to terminate them,” he says. “Managers are actually exempt from that process, so it actually makes it easier for federally regulated employers to terminate because they don't have to worry about the unjust dismissal mechanism.” 

However, statutory termination entitlements can obscure a critical requirement that some organizations overlook if they’re considering mass layoffs such as Bell Canada and Canada Post. Before conducting any mass termination, employers must understand the specific rules.  

“There are special statutory rules in employment standards legislation across the country that relate to mass terminations,” says Pelkey. “Typically, these rules are based on how many employees are terminated at a time, the timeframe for their termination, the geographic scope of where they're terminated from and, in some cases, a percentage of the employer's operation.” 

When mass termination thresholds are triggered, employers may owe increased statutory notice periods, notice to government ministers, workplace postings, and even joint planning committees at the federal level. “it's very important [for organizations] to read their applicable employment standards legislation to figure out whether or not they have to comply with these requirements and, if they do, what requirements with which they need to comply.” 

Nature of the job could affect notice entitlement 

Courts apply identical notice tests regardless of whether employees are managers or frontline workers, examining age, length of service, character of employment, and availability of alternate work. The test is the same, but contextual circumstances can lead to bigger liability for employers, says Pelkey, who notes that managers are typically older, have longer tenure, are higher paid, and face harder job markets than lower-level workers. 

“Especially now, when you look at this trend we're seeing with companies like Air Canada, Canada Post, and all these big tech companies that are eliminating management positions first and getting a flattened management structure — that means that the job market is shrinking and you're having more candidates going out into that market looking for work,” says Pelkey. 

As the availability of comparable employment is one of the factors courts consider in determining reasonable notice periods, a shrinking job market can produce longer notice periods entitlements for management employees. “It's not based on a legal distinction between a management and frontline worker — it's just based on the contextual factors that often accompany somebody who's in a management position,” says Pelkey. 

Contractual and competitive complexity 

Organizations can manage their termination liabilities through enforceable employment contracts, but management employees are more likely to have more complex compensation arrangements than typical workers — equity plans, bonuses, commissions, and deferred compensation are all factors that can create significant cost exposure for an organization contemplating management terminations. 

Management positions can also carry restrictive covenants that frontline workers are less likely to have, because managers can occupy critical organizational roles with access to confidential information and valuable institutional knowledge, says Pelkey.

“You see non-competition clauses or agreements, non-solicitation clauses, confidentiality clauses, intellectual property clauses — these are all going to be obligations on that worker that the company is going to have to figure out if will try to enforce after termination or not,” he says. 

Pelkey also points out that, if restrictive covenants are absent or unenforceable — the latter becoming increasingly common — organizations also have to think about the organizational impact and potential consequences of managerial employees joining a competitor after being dismissed with their knowledge of the business, clients, and their previous organization. 

Heightened litigation risk from fired managers 

Regardless of an organization’s strategy and approach to management layoffs, Pelkey has seen in his practice that such terminations trigger significantly more legal disputes. “When I'm dealing with termination of management or executive-level employees, I think things become quite a bit more litigious and litigation is usually a more likely,” he says. 

The increased litigation risk can be expected when certain factors are considered. Management employees generally earn higher salaries with larger bonuses, commissions, and other perks like stock options, and they likely to have more knowledge of their rights. “These are employees with compensation entitlements that can be a bigger deal, so there's more of an incentive to litigate these issues and spend the legal fees because they can recoup a lot of those costs at the end if the employee is successful,” says Pelkey, adding that managers may have greater resources to pursue legal action. 

Highly publicized layoffs like Air Canada's cuts run the risk of damaging morale among remaining staff. Pelkey emphasizes the need for communication when following through on staff reductions. “If you've got a workforce that's already on edge and facing economically uncertain times, everyone would agree that having your company lay off 400 people, like what Air Canada did, can cause significant morale issues that the employer is going to have to find a way to address.” 

As such, an organization’s strategy for cutting jobs needs both communication internally to remaining staff and externally to shareholders and the public, according to Pelkey. “Having a public communication strategy is valuable, just to get the messaging out the way that the company would like it to go out, and avoid the rumour mill and speculation that can occur otherwise,” he says. 

Preserving and protecting company information, knowledge 

While reducing management layers may improve efficiency, eliminating managers without considering organizational impact can be problematic in the aftermath of mass layoffs. Strategically, Pelkey believes that organizations need to ensure they’re preserving the institutional knowledge of dismissed management and the line of corporate hierarchy necessary for the organization’s success. “To go in and remove that without any thought about what the replacement hierarchy is going to look like could cause huge issues with respect to efficiency, communications, and again with respect to morale,” he says. 

Pelkey believes that the most critical strategic error organizations make is failing to establish proper documentation frameworks before a mass layoff is initiated. “I think that a lot of times where HR leaders and their organizations run into problems is not setting up their employment relationships right from the outset,” he says. “Long before termination is ever required, you get a lot of companies who have handshake employment agreements or promotions of employees, and many who are relying on outdated employment contracts to manage the risks and costs associated with terminations.” 

This is particularly important in a Canadian legal landscape where courts are increasingly challenging termination clauses, adds Pelkey. 

When layoffs become necessary, particularly in the management ranks, HR leaders should conduct a comprehensive financial analysis where they can assess the potential entitlements for affected employees, what could make acceptable packages for them, and add up all the expected costs, says Pelkey. “Then you'll have a good picture of what it’s going to cost you,” he says.