Third and final installment on this first point. To recap, in Part 1 of this series, we discussed whether an employer has cause to terminate employment without notice. Assuming the employer did not have cause to terminate employment we discussed termination provisions in employment contracts in Part 2 of the series. This third post will discuss situations in which there is no enforceable termination provision that applies to the employee.
By way of reminder, you will recall that we outlined two options for termination at the outset of Part 2 of this series. I have reproduced my (high quality) graphic below to jog your memory. This is the option we will explore in this post.
Click here to view the image.
Employment Relationships Are Contractual
All employment relationships in Ontario are contractual, whether or not there is a written offer letter and/or employment agreement in place. The common law creates a number of contractual obligations for both parties (the employer and the employee). These obligations can only be modified by way of a written agreement.
For those of you who are wondering, the term “common law” describes the legal system we have in Ontario. We inherited it from the United Kingdom. In “pure” common law systems, there are very few written laws. Instead, most laws are created by judges, who will hear cases and make rulings. Any new case must be decided the same way as earlier cases with similar facts. In this way, the common law is “judge-made” law. When you hear the phrase “legal precedent”, it is a reference to earlier cases.
What Does the Common Law Say About Termination?
In the employment context, either party to the employment contract must provide the other party with “reasonable notice of termination”. The purpose of reasonable notice is to cushion the parties against the negative impacts of the termination: the employer can take the necessary steps to replace the employee and the employee can seek and obtain comparable alternate employment.
Reasonable notice is a moving target. Lawyers look at precedents to decide what the range might be in any given case. For employers seeking to terminate an employee, judges have provided some guidance on the factors that will be taken into account to determine the reasonable notice period, the most important being: the employee’s age, years of service, position, and compensation. As each of these factors “increases”, so does the reasonable notice period. The assumption is that a 60 year-old CEO with 20 years of service who earns $500,000 per year will require a longer period to obtain comparable alternate employment than an 18-year old line worker earning minimum wage.
With all this in mind, you’ll understand why the general wisdom that an employee is entitled “one month per year” is inaccurate. Reasonable notice can span anywhere from 2 to 6 weeks per year of service, and for very long service employees, can be upwards of 24 months total notice.
The common law obligation is to provide working notice. During the working notice, the employee continues to report to work and the employer maintains all compensation and benefits. Where an employer fails to provide notice, or provides too little, the employer has breached the employment contract and is on the hook for “damages”. Those damages are usually referred to as “pay in lieu of notice” and are calculated on the basis of all compensation and benefits the employee would otherwise have received had she actually worked through the notice period. This includes pension contributions, bonuses, commissions and equity grants, unless the terms of the applicable plan expressly state otherwise.
I would flag that the common law reasonable notice requirement will include all of the employee’s minimum entitlements under the Ontario Employment Standards Act (see the graphic above). That being said, the obligation to provide severance pay under the ESA cannot be satisfied by way of notice – it must be paid out as a lump sum (unless the employee agrees to have it paid out over time). In my experience, since most employers terminate employees with immediate effect, this issue rarely arises.
The common law position doesn’t work for employers for two reasons: (1) it is expensive and (2) it is uncertain. The second reason is also what leads so many employees to retain counsel (and litigate) upon termination – it is always possible that a judge will award a greater notice period than the package offered by the employer.
For all of the above reasons, it is always our recommendation that an employer have a written offer letter or employment agreement in place with its employees that clearly outlines the employee’s entitlements in the event of a termination without cause. In addition to minimizing costs, termination provisions also provide certainty to both parties on what their legal obligations to one another will be.