Ontario Superior Court decision expands application of severance pay under the ESA

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A recent decision of the Ontario Superior Court of Justice may have significant financial implications for organizations with interprovincial operations.  As many employers are aware, section 64 of the Ontario Employment Standards Act (ESA) requires employers to provide severance pay to employees upon termination in certain circumstances.  Section 64 requires employers with a payroll of $2.5 million or more to pay severance to employees who have five years or more of service.  Until recently, in determining an employer’s payroll, the Ontario Ministry of Labour, Ontario courts and the Ontario Labour Relations Board have only taken into account the employer’s payroll in Ontario.  However, in Paquette c. Quadraspec Inc. (April, 2014 – in French only), Judge Kane held that for the purposes of section 64 of the ESA, it is the employer’s entire payroll that is included in the calculation, not just the payroll in Ontario.

The Paquette decision involved a motion for summary judgment, in which a terminated employee challenged the validity of the termination provision in his contract of employment on the basis that it did not meet the minimum statutory requirements set out in the ESA.  The employment contract permitted the employer to terminate the employment upon two weeks of notice for every year of service up to a maximum of six months.  It also stated that the employee was entitled to benefits but only to the extent that such benefits were accumulated up to the point of termination.  Section 60 of the ESA states that the employer must maintain benefits for the duration of the notice period.  Since the termination provision of the employment contract did not meet the minimum requirements of the ESA, Judge Kane held that the employment contract termination provision was null and void, and the common law requirements for reasonable notice applied.

In this regard, Judge Kane followed a well-established line of cases, such as Wright v. Young and Rubicam Group of companies (Wunderman) (2011) and Stevens v. Sifton Properties Ltd. (2012), which hold that there is a presumption that employment contracts for indefinite periods require the employer to give common law reasonable notice in the event of termination.  Where employment legislation sets minimum requirements for notice, but also provides that contracts specifying greater benefits to an employee prevail over such minimum requirements, then the common law reasonable notice is characterized as a greater benefit, and it prevails.  The presumption in favour of common law reasonable notice can be rebutted by express contractual language that clearly sets out some other period of notice.  If however, the employment contract does not meet the statutory minimum requirements set out in the employment legislation,  the relevant provisions are rendered null and void.  Therefore, the presumption in favour of common law reasonable notice will not be rebutted. As was the case in Paquette, the employer was not able to rely on the terms of the employment contract and was required to provide common law reasonable notice.        

Judge Kane next turned to whether the employer was required to pay severance in accordance with section 64 of the ESA.  As noted above, this was contingent on whether the employer’s payroll was greater than $2.5 million.  Evidence showed that the employer’s payroll in Ontario was less than the ESA threshold.  However, if the payroll in respect of the employer’s Quebec operations was included in the calculation, then the employer’s payroll exceeded the ESA threshold.   

In holding that the employer’s entire payroll should be used for the purpose of this calculation, Judge Kane noted that in other statutes, such as the Pay Equity Act, the legislature is clear and explicit when it chooses to limit payroll calculations to Ontario payrolls.  Furthermore, although the Ontario legislature is not permitted to regulate payroll matters in other jurisdictions, it does have the power to set out what measures will be used in the application of Ontario laws.  In this regard, Judge Kane stated that the legislation was clear, and there was no legal justification or jurisdiction to impose restrictions on section 64 of the ESA, which were not explicitly provided for in the legislation.  The employer’s Quebec payroll was included in the calculation and the employer was required to provide severance pay.

In our view

Subject to the $2.5 million threshold being met, the ESA provides that employees with a minimum of five years of service are entitled to one week of severance pay for each year of service up to a maximum of 26 weeks.  As such, unless the Paquette decision is overturned, it may significantly increase the labour costs of multi-jurisdictional employers with operations in Ontario.  Even where an organization only has a single employee in Ontario, if its total payroll is greater than $2.5 million it may have to pay significant amounts for ESA severance, should it terminate the employment in Ontario. 

For further information, please contact Mélissa Lacroix at (613) 940-2741.