Ontario’s Minimum Severance Requirements Reinterpreted for Large Out-of-Jurisdiction Employers
An Ontario court has decided that an employer’s global payroll is to be counted when determining whether it is required to pay a dismissed employee severance pay in addition to providing the employee with a maximum of 8 weeks’ notice of dismissal pursuant to its minimum statutory obligations set out in the Employment Standards Act, 2000 (“ESA”).*
The ESA requires larger employers to pay a minimum of one week of severance pay to a dismissed employee for each year of service up to a maximum of 26 weeks’ pay if an employee has employed by the employer for at least 5 years. The requirement to pay severance applies to employers with annual payrolls of $2.5 million or more. Employers with smaller annual payrolls are generally exempt from the requirement.
Section 64 of the ESA states:
Entitlement to severance pay
64. (1) An employer who severs an employment relationship with an employee shall pay severance pay to the employee if the employee was employed by the employer for five years or
(a) the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or
(b) the employer has a payroll of $2.5 million or more
The $2.5 million dollar payroll requirement had previously been interpreted as referring only to an employer’s Ontario payroll. The result was that some large employers (including multi-billion dollar multi-national corporations) were exempt from paying statutory severance because their Ontario operations only employed a small number of individuals (often in a sales office).
However, in Paquette c. Quadraspec Inc., 2014 ONCS 2431 the Ontario Superior Court of Justice concluded that an Ontario employer’s global payroll was to be used when determining whether the employer has an obligation to pay a dismissed employee statutory severance pay.
The decision presents a challenge for English only readers because it is written in French and, to date, there has been no official English translation.
Justice Paul Kane held in Paquette that the Ontario legislature did not intend to limit the payroll calculation to Ontario when it passed the legislation. He noted that the debates in the legislature that led to the $2.5-million threshold demonstrated that the purpose of the provision was to protect workers who worked for a company “that is part of a larger enterprise.” The judge also noted that s. 64 of the ESA does not explicitly limit the calculation to a company’s Ontario payroll. In contrast, the Pay Equity Act does limit payroll calculations to the “total of all wages and salaries payable to the employees in Ontario of the employer” and the legislature was free to use similar limiting language in the ESA if that was its intent.
Justice Kane’s decision has been criticized as unconstitutional based on the argument that a provincial statute such as the ESA can only regulate employment and labour relationships within the province. However, the decision does not attempt to regulate labour relationships outside of the province. Instead, it merely states that an employer’s global payroll should be referenced when determining whether an employer has an obligation to pay statutory severance to a dismissed Ontario employee.
From a policy perspective, Justice Kane’s decision must be correct. The severance exemption was designed to ease the financial burden of dismissing employees for small businesses that are often perceived to be more financially vulnerable than large established corporations. It does not make any sense to give preferential treatment to large corporations that have made the decision not to invest significantly in their Ontario operations.
* The ESA only sets out minimum notice and severance requirements if an employee is dismissed. The dismissed employee may have the right to a significantly larger termination package if the employee is entitled to reasonable notice of dismissal at common law or some other greater contractual entitlement.