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(Adds CP Rail, Teamsters' comments)
TORONTO, Feb 15 (Reuters) - Canadian Pacific Railway's train engineers and conductors walked off the job on Sunday as a midnight deadline to reach agreement on a new contract passed, setting the stage for back-to-work legislation to be enacted by the government.
Canada's No. 2 railway had reached a last-minute deal with another union, Unifor, which represents safety and maintenance workers minutes before the deadline.
But it did not agree terms with Teamsters Canada Rail Conference (TCRC), which represent more than 3,000 locomotive engineers and conductors.
"Picket lines are now being set up across Canada and the rail shut down is happening," TCRC President Douglas Finnson said in a statement.
The Teamsters and Unifor, Canada's largest private sector union, had both set a Feb. 15 strike deadline.
CP said it was disappointed talks had broken down and its offer for "immediate mediation and arbitration" rejected.
CP, which also has a substantial U.S. network, said last week that its managers will be ready to take over if engineers and conductors go on strike. On Sunday, it said it will deploy its contingency plan and operate reduced freight service on its Canadian network.
A strike would reduce earnings per share by about one cent per day, the Calgary-based company previously said.
CP earned C$2.63 a share in the fourth quarter.
The Canadian government joined contract talks between CP and unionized staff on Friday to help stave off a potential strike but it also began laying the groundwork to introduce back-to-work legislation.
The Conservative government put the legislation on Parliament's notice paper for Monday, meaning it could pass it into law soon after a strike.
In recent years, the government has intervened or threatened to intervene in several major labor disputes in the transportation sector.
Unpredictable schedules and fatigue problems have been key issues in the Teamsters negotiations. CP has said union demands were unreasonable.
"(Union) leadership claims that lack of time off is at the heart of its reluctance to negotiate, yet 72 percent of all engineers and conductors do not take the time off they are entitled to," CP said on Sunday.
Scheduling has been an ongoing labor issue at both CP and at Canadian National Railway Co, Canada's largest rail operator.
CN reached a tentative deal with the Teamsters union on Saturday and is still in talks with Unifor. Unlike CP, it had not faced a strike deadline from either union.
Reporting by Amran Abocar; Editing by Kim Coghill