Government cutbacks not a reason for layoff under collective agreement

Sharp government cutbacks are a reality familiar to many public sector employers. A recent decision of the Ontario Court of Appeal illustrates the particular risks faced by employers who depend on government funding to run their operations. It also demonstrates the care that must be taken in drafting the language of the collective agreement to anticipate changes in funding levels over which the employer has no control.

At issue in Huron (County) v. Service Employees Union, Local 210 (October 25, 2000) were the layoffs in 1993 of 19 employees from two municipally owned homes for the aged. The layoffs were effected following a significant funding cut announced by the provincial government and legislative changes to the minimum standards of care to be provided by nursing homes.


The union grieved, citing Article 12.06 of the collective agreement, which defined layoff as meaning “the discontinuation of a position(s) due to lack of work”. The employer responded by pointing to Article 4.02, the management rights clause, under which the union recognized the employer’s “right to decide on the number of employees needed by the Employer at any time”.

The arbitrator acknowledged that Article 4.02 gave the employer broad rights to manage the workplace, but agreed with the union that this clause was “subject to explicit restrictions in the collective agreement such as Article 12.06”. Therefore, he held, the issue was whether or not the layoffs had resulted from a lack of work.

The employer argued that the change in the funding formula left it with little choice: the layoffs were the most sensible and least painful response open to it, and far preferable to shutting down one of the homes altogether. While stating that he was “not without sympathy for the employer’s plight”, the arbitrator responded that, given his role, there were limits to what he could do to assist the employer:

    “Despite these feelings I have, I cannot lose sight of my role as an arbitrator hearing a grievance. That is to interpret and apply the provisions of the collective agreement. I have no equitable remedial authority to relieve a party from any obligation it has under a collective agreement, because I feel that enforcing [it] results in some unfairness. … It is only the parties themselves who are in a position to compromise on their strict rights if they feel that strict enforcement is not desirable in a given situation.”

The arbitrator went on to find that the layoffs had not resulted from a lack of work, and accordingly upheld the union’s grievance.


The award in favour of the union was quashed by a unanimous panel of the Divisional Court. The fact that the lack of work had resulted from the financial inability of the employer to pay for the work, rather than reduced resident demand, the Court stated, made it no less real.

The arbitrator’s interpretation of Article 4 was an unreasonable curtailment of the employer’s right to determine the size of its work force. Article 12, in the Court’s view, merely assured employees that downsizing would not lead to an increased workload. The arbitrator’s interpretation was patently unreasonable, in light of Article 4 and the economic situation facing the employer, and resulted in placing a “financial straitjacket” on the employer. A sensible interpretation of the agreement, the Court held, would avoid such a result.


The arbitrator’s award was restored on appeal. The Court noted that the award could be quashed only if it met the test of being patently unreasonable. This was a strict test, in that it was not enough that the award be incorrect in the eyes of the court; it had to be “clearly irrational”. Here, the arbitrator had provided a rational explanation for his interpretation, and had applied “a well-accepted rule of interpretation, that in considering the context of the contract as a whole, a general power is to be read as limited by a specific restriction”. It was a reasonable interpretation, and consequently not open to interference from the courts.

The Court went further, however, and expressed criticism of the Divisional Court’s own interpretation, particularly its view on the impact of external economic factors on contract interpretation:

    “It was not open to the arbitrator nor, for that matter, to the Divisional Court, to rewrite the bargain the parties had negotiated, based on the ‘reality of the economic situation facing the employer’. One of purposes of a contract is to allocate the risk of future economic contingencies.”

The arbitrator was aware of the economic factors at work in this case, the Court stated, and rather than ignoring them, he found that under the agreement, the employer had to assume the risk of funding cuts, not the union.

In Our View

As noted, the Court of Appeal went further than stating that the arbitrator’s award was not patently unreasonable. It reminded the Divisional Court that the fact that events turn in a direction that is unfavourable to a party to a contract is not grounds for amending the contract, unless both parties consent. In light of this decision, and the “reality” of reduced funding levels, public sector employers should review their contract language to ensure that layoffs are not restrictively defined as resulting from a shortage of work.

On June 21, 2001, leave to appeal to the Supreme Court of Canada was denied.

For further information, please contact Lynn Harnden at (613) 563-7660, Extension 226 or George Rontiris at (613) 563-7660, Extension 275.

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