Employers and human resources professionals are familiar with the Ontario Employment Standards Act (ESA) and that it plays a role insetting out what an employee must receive at the time of termination. However, in our practice, we have noted several common areas where there is often confusion about the specific, sometimes technical, requirements of the ESA. Further, courts have recently been making high damage awards against employers struggling with this confusion who fail to properly provide their terminated employees with all of their statutory entitlements.
How much notice or termination pay is owed?
While most employers are comfortable with section 57 of the ESA setting out the prescribed amounts for notice of termination or termination pay that must be provided, many make mistakes with vacation pay over the termination period. It is important to note that an employee continues to accrue vacation pay over their ESA notice period. Where an employee has been given working notice, this is a natural conclusion. However, when an employee is terminated without notice and is paid out, employers must calculate the value of vacation pay that would have been earned during the notice period and pay that in addition to accrued unused vacation to the date of termination.
When assessing the length of service for an employee in order to determine their appropriate notice period, consideration must be given to whether there have been any breaks in the employee’s service. Under the ESA, only breaks in service of more than 13 weeks are considered to reset the period of employment. Protected leaves set out under part XIV are not considered breaks in service.
What needs to happen during the notice period?
Section 60 of the ESA requires that an employer not reduce the employee’s wage rate or alter any other term or condition of their employment during the notice period. Even when an employee is terminated effective immediately, the time period that would have otherwise been their notice period is still relevant in the context of section 60. For example, if an employee was terminated today, but their notice period would have been six weeks, then section 60 still applies for six weeks after termination. The result of this section is that where an employee would have been paid out commission during the statutory notice period, it must be paid out to the employee as part of their termination pay. This also may be true for bonuses which would have been paid out over the notice period, but bonus entitlement is a more complicated area. We wrote more about this issue in our April 11, 2023 blog post. Benefits and other forms of compensation must also be continued during the notice period. This includes things like phone or car allowances, or the use of a company car or phone even though the employee is no longer using them for work.
Employers are comfortable with the fact that severance is owed to employees who have worked for five years or more at an employer that has a payroll of at least $2.5 million. Where mistakes often occur is that, unlike termination pay, severance pay is prorated to include any incomplete years. For example, an employee who worked for six years and 6 months would be entitled to 6.5 weeks of severance pay.
Also different from termination pay, as per section 65(2), all periods of employment that the employee has spent with the company are considered when calculating the total severance owed. For example, an employee who worked at a company for 10 years, who then quit and worked elsewhere for three years before then returning to the original company for another five years of work would be owed a total of 15 weeks of severance pay.
Finally, on severance pay, employers should keep in mind that the courts have more recently interpreted the payroll calculation for the $2.5 million threshold to include the national and international payroll of the company. It was confirmed by the Divisional Court in Hawkes v. Max Aicher (North America) Limited, 2021 ONSC 4290 that payroll calculations as required by section 64 of the ESA must take into account an employer’s global payroll and not just the payroll in Ontario. Large national or multinational employers with a relatively small number of Ontario employees should pay close attention to this decision.
When and how do termination and severance pay need to be paid?
As per section 11(5) of the ESA, employers must pay amounts owing after termination to an employee by seven days after the employment ends, or the next payroll date, whichever is later. This term of the ESA still applies even when a further offer has been made by the employer in exchange for a release, and a final agreement has not yet been reached. Accordingly, even if negotiation with the employee is ongoing, these statutory minimums must be paid out within the prescribed time frame. This is a common pitfall for employers, who make the decision to wait until receiving a release to pay out the final total amount and face additional claims if a deal is not reached.
As well, often employers will attempt to unilaterally pay out termination and severance pay as salary continuance. However, unless the employee has explicitly agreed to the arrangement, this is a breach of the ESA. These two issues, timing and form of payment, have been the subject of much recent litigation and some high-value damage awards. In Pohl v Hudson’s Bay Company, 2022 ONSC 5230, Justice Centa awarded $45,000 for moral damages and $10,000 for punitive damages in part because the employer did not pay Mr. Pohl’s severance pay within the required time frame, but rather paid it out on salary continuation for two months before finally paying out the balance as a lump sum. This was not only used to justify moral damages but also the punitive damage award.
The termination letter
In addition to properly calculating the total amounts owed to an employee under statute, it is key to clearly communicate to the employee in the termination letter that these entitlements will be provided to them without strings attached. Where an employer offers a further payment in exchange for the employee’s signature of a release, it is very important for the employer to make it clear to the employee that even if they choose not to accept the further offer and sign the release, they will still receive their minimum entitlements under the ESA. In Russell v The Brick Warehouse LP, 2021 ONSC 4822, the court awarded $25,000 in moral damages for the employer’s failure to deal fairly with Mr. Russell, including failing to notify him that he would be provided with his minimum entitlements and failing to meet all statutory entitlements in their offer to him.
In recent years, courts have made it clear that there will be significant consequences for a failure to comply with the ESA when terminating an employee. While it can be a complicated task, taking the time to carefully ensure that all requirements have been met can save employers significant financial consequences in the long run.