According to a recent judgment of the Ontario Superior Court, employers may now be forced to take their establishment’s total payroll into account in determining an employee’s entitlement to severance pay under the Ontario Employment Standards Act, 2000, S.O. 2000, c. 41 (the “Act”). Until now, the practice had always been to grant severance pay according to an employer’s Ontario payroll. This judgment could therefore prove to be quite costly for businesses with modest operations in Ontario but with more substantial activities outside of Ontario.

Statutory Treatment of Severance Pay

Pursuant to the Act, an employer in Ontario must provide an employee with notice or pay in lieu of notice upon the termination of his or her employment if he or she has three months or more of service. Under the Act, an employee can be entitled to a maximum of eight weeks of notice.

Under certain circumstances, an employee is also entitled to severance pay following the termination of his or her employment. The Act provides that severance pay must be paid if the employee has worked for the employer for five years or more and:

  1. 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
  2. the employer has a payroll of $2.5 million or more.

Over the years, the courts, the Ontario Labour Relations Board, the Ministry of Labour and employers have narrowly interpreted this latter criterion by solely considering the employer’s payroll in Ontario.

However, since the case of Paquette v. Quadraspec Inc., 2014 ONSC 2431 (“Paquette”), there are no guarantees.

The Paquette case

In this case, Quadraspec had employed Mr. Paquette for more than 28 years. Quadraspec operated three plants in Quebec and Ontario that had a combined payroll of more than $2.5 million. However, the business’s payroll in Ontario did not reach the $2.5-million threshold.

Further to the termination of his employment, the employer paid Mr. Paquette more than six months of wages in accordance with a termination clause in his employment agreement. However, Mr. Paquette moved to contest the legality of the termination clause in order to obtain a more generous notice pursuant to common law.

It is important to note that the only issue before the Court in connection with this motion was whether the termination clause was null and void for failing to meet the Act’s statutory requirements. In that respect, Justice Kane determined that the termination clause was invalid as it contravened sections 60(1)(c) and 61(1) of the Act regarding the employer’s obligation to maintain the employee’s fringe benefits during the notice period.

However, despite having already determined that the termination clause was null and void on the basis of the wording pertaining to the fringe benefits, Justice Kane also decided to consider Mr. Paquette’s right to severance pay pursuant to the Act.

Notwithstanding contradictory jurisprudence on the topic, Justice Kane conducted his own analysis of the issue and concluded that Quadraspec’s payroll should be calculated taking into account the payroll of all of its operations in Ontario and Quebec. He based his analysis on the absence of any prescribed limitations in the Act and his reluctance to specify such terms when the legislature had specifically limited this criterion in other statutes, such as the Pay Equity Act. Moreover, he noted that when the provision at issue was introduced, the Minister of Labour had not opted to limit the scope of “payroll” in his opening remarks. Thus, Justice Kane refused to limit the scope of the term “payroll” to Ontario and instead, ruled that the payroll of all of Quadraspec’s operations had to be considered, notwithstanding their location.

Implications for employers

Justice Kane’s decision on severance pay has no significant implications on Mr. Paquette’s case. In light of his ruling that the termination clause is invalid, the dispute will now deal with the appropriate notice period under common law and Mr. Paquette’s obligation to mitigate his damages.

This decision is, however, of special interest to businesses with few activities in Ontario, but with more substantial activities outside of Ontario. It is important to mention that the judgment does not stipulate whether employers should also consider any payroll outside of Canada. Nonetheless, this decision may increase the costs associated with the termination of employment of employees who do not have access to significant reasonable notices under common law, especially in connection with the costs associated with either the shutdown or the sale of a business.

The seeds of doubt are sown

Since the advent of severance pay in 1987, the courts, the Ontario Labour Relations Board, the Ministry of Labour and employers have interpreted section 64 of the Act in a common manner. The requirements were clear; the calculation of the payroll is based on the employer’s establishments in Ontario and not on all its activities, whether in Ontario or elsewhere.

However, the Paquette case now raises some doubt, a doubt that will not be put to rest in the near future since the employer will not be appealing the decision.

Thus, we are left to wait and see whether the Ministry of Labour will take a position on the issue, whether the legislature will intervene, or if a superior court will once again weigh in.

For the time being, it goes without saying that employers operating in Ontario are encouraged to proceed with caution in their analysis and application of the provisions of the Act pertaining to severance pay.