As many employers know, severance pay is a statutory entitlement that some employers must pay to certain of their employees upon termination when relevant thresholds are met, in addition to statutory notice of termination or termination pay. Unfortunately, because of these thresholds, severance pay is one of the more difficult elements of the Employment Standards Act, 2000 (the “ESA” or the “Act”) for employers to understand. Further complicating the matter is the frequency with which the terms severance pay and termination pay are used interchangeably, despite that they are each specifically defined in the ESA.
When Severance Pay Must be Paid
In Ontario, severance pay must be paid by some employers to dismissed employees who have five or more years of service with their employer. Severance pay is required to be paid by employers that have an overall annual payroll of $2.5 million or more and/or when an employer permanently discontinues operations and dismisses 50 or more employees within a six-month period.
Although the ESA provides a formula to determine whether the payroll threshold has been met, it does not address whether the payroll of employees outside Ontario or Canada should be included. That question, as well as when the payroll of a related but legally distinct business should be included in calculating payroll, have long created confusion for employers.
In 2014, the Ontario Superior Court of Justice held in Paquette v Quadraspec Inc. [Paquette] that the employer’s Quebec payroll was required to be included in the employer’s payroll for the purpose of determining whether it met the severance pay payroll threshold. This decision had been a departure from prior jurisprudence which had held that the ESA only pertains to Ontario employment and thus that only Ontario payroll ought to be considered.
More recently, in Doug Hawkes v Max Aicher (North America) Limited, and the Director of Employment Standards [Hawkes], the Ontario Labour Relations Board (the “Board”) weighed in on the matter and diverged from the Superior Court in Paquette in holding that only Ontario-based payroll should be considered in severance pay determinations.
The decision in Hawkes relied on the Board’s specialized expertise regarding the ESA and case law decided prior to Paquette. The Board followed the pre-Paquette case law in holding that since the ESA applies only to employees performing work in Ontario, only work in Ontario should be considered for the purposes of severance pay.
The Board found that the absence of the words “in Ontario” in section 64 of the ESA (which pertains to severance pay) did not suggest that adjudicators should apply the provision to the entire payroll of the employer, regardless of whether or not all of the employees were based in Ontario. This logic is consistent with the rest of the ESA which also does not specify Ontario in each provision, but which nevertheless is understood to only be applicable to employees within Ontario.
In sum, the Board found that it does not make sense to presume that provincial legislation could affect employment or operations anywhere but Ontario. Thus, only payroll in Ontario is relevant for determining entitlement to severance pay.
Although Hawkes does not finally settle the question of whether non-Ontario employment is relevant for the severance payroll threshold, its decision is likely to be followed by other adjudicators in future. Since the decision of Hawkes, the Paquette decision has become an outlier, especially in consideration of the similar line of reasoning of cases adjudicated prior to Paquette.
Nevertheless, employers must be aware of the potential for uncertainty in the applicability of severance pay, particularly if a claim is brought in Superior Court. Adjudicative bodies tend to favour precedents from their own body over those from other bodies. Courts, for example, will tend to follow court-generated jurisprudence, while tribunals will often follow the jurisprudence their own body has developed, except where required by law to follow another body’s decision. For this reason, courts may be inclined to follow Paquette while the Board will follow Hawkes. Nevertheless, decisions of the Board are very persuasive in employment matters and the Hawkes decision may well be adopted in the Ontario courts as well. Employers would be wise to leverage the decision of Hawkes before any Ontario court if they face a civil action that includes a claim for severance pay.
In any event, for now, small employers in Ontario – who are meant to be protected by the $2.5 million severance threshold – can breathe a sigh of relief knowing that their operations outside of Ontario, regardless of size, will likely not be considered by the Board in determining whether or not they are severance pay employers. Ontario employers with lucrative operations outside this province will consequently face lower costs with respect to severance pay for carrying on business in Ontario.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.