Terminating Employment in Ontario

Overview

The cost of terminating employment in Ontario starts with statutory entitlements and can involve contractual provisions and common law entitlements.? The rules under the?Employment Standards Act, 2000?(the “ESA”) about termination of employment are minimum requirements which cannot be avoided. Some employees may have rights under an employment contact or collective bargaining agreement or under the common law that provide them with greater rights than those under the ESA.

Common law obligations for reasonable notice of termination will always add an element of uncertainty, as calculating payment in lieu of notice at common law requires an understanding of the impact of the termination on the affected employee. The factors to be considered in determining reasonable notice are discussed below. The only way an employer can attempt to mitigate the cost of common law obligations is to have well‐drafted termination provisions in their employment contracts and to keep those provisions current.

What is Termination of Employment?

Under the?ESA, a person's employment is terminated if the employer:?

·?????? dismisses or stops employing an employee, including where an employee is no longer employed due to the bankruptcy or insolvency of the employer;

·?????? “constructively” dismisses?an employee and the employee resigns, in response, within a reasonable time; or

·?????? lays an employee off for a period that is longer than a “temporary layoff”.

The?ESA does require that the employer give written notice of termination to the employee but does not require the employer to give the employee a reason why their employment is being terminated. However, if the employer gives a reason for termination to the employee, it must be truthful and not misleading.

There are some situations where an employer?cannot?terminate an employee even if the employer is prepared to give proper notice of termination. For example, an employer cannot end someone's employment, or penalize them in any other way, if any part of the reason for the termination of employment is based on the employee asking questions about or exercising their statutory rights, for example under the ESA, Occupational Health and Safety Act, or Ontario Human Rights Code. ?

Constructive Dismissal

A constructive dismissal may occur when an employer makes a significant change to a fundamental term or condition of employment without the employee's actual or implied consent.

For example, an employee may be constructively dismissed if the employer makes a change?? that results in a significant reduction in salary or a significant negative change in such things as the employee's work location, hours of work, authority or position. Constructive dismissal may also arise out of situations where an employer harasses or abuses an employee, or an employer gives an employee an ultimatum to “quit or be fired” and the employee resigns in response.

In order for the employer's actions to be considered a constructive dismissal, the employee would have to resign in response to the change or conduct within a reasonable period of time.

Temporary Layoff

The right to temporarily lay off an employee must be negotiated as part of the contract of employment, but the mechanics of the layoff are governed by the ESA.

An employee is on temporary layoff when an employer cuts back or stops the employee’s work without ending his or her employment (e.g., laying someone off at times when there is not enough work to do). The mere fact that the employer does not specify a recall date when laying the employee off does not necessarily mean that the lay-off is not temporary. Note, however, that a lay-off, even if intended to be temporary, may result in constructive dismissal if it is not allowed by the employment contract or actual dismissal where the lay-off is offside the provisions of the ESA.

Employers are not required under the ESA provide employees with a written notice of a temporary layoff nor do they have to provide a reason for the lay-off. They may, however, be required to do both under a collective agreement or an employment contract.

Under the ESA, a “temporary layoff” can last:

(a)?? not more than 13 weeks of layoff in any period of 20 consecutive weeks; or

(b)?? more than 13 weeks in any period of 20 consecutive weeks, but less than 35 weeks of layoff in any period of 52 consecutive weeks, where:

(i)??? the employee continues to receive substantial payments from the employer; or

(ii)? the employer continues to make payments for the benefit of the employee under a group or employee insurance plan (such as a medical or drug insurance plan) or a retirement or pension plan; or

(iii)??the employee receives supplementary unemployment benefits; or

(iv) the employee would be entitled to receive supplementary unemployment benefits but is not receiving them because he or she is employed elsewhere; or

(v)?? the employer recalls the employee to work within the time frame approved by the Ministry of Labour Director of Employment Standards; or

(vi) the employer recalls the employee within the time frame set out in an agreement with an employee who is not represented by a trade union; or

(c)?? a layoff longer than a layoff described in “(b)” where the employer recalls an employee who is represented by a trade union within the time set out in an agreement between the union and the employer.

If an employee is laid off for a period longer than a temporary layoff as set out above, the employer is considered to have terminated the employee's employment. The employment is then deemed to have been terminated on the first day of the lay-off. Generally, the employee will then be entitled to termination pay.

Qualifying for Notice of Termination or Pay in Lieu of Notice

The concept of “at will” employment does not exist in Ontario or elsewhere in Canada. Therefore, any “at will” employment clause in an employment contract will be void, and absent cause for dismissal (which is generally a very high threshold to meet), an employer is obliged to provide an employee with reasonable advance notice of termination of employment or a payment in lieu of advance notice. ?

Certain employees are not entitled to notice of termination or termination pay under Regulation 288/01 of the?ESA. Examples include employees on a temporary layoff, an employee who refuses an offer of reasonable alternative employment, an employee who has been guilty of wilful misconduct, disobedience, or wilful neglect of duty that has not been condoned by the employer, and an employee whose employment has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance.

Statutory Notice of Termination and Termination Pay

The ESA requires that termination of employment be confirmed in writing. An employee who has been employed for 3 months or more are entitled to either working notice of termination or termination pay in lieu of notice or a combination of both. ?In Ontario, the regulations under the ESA also require that an employer provide fresh notice of dismissal if the termination date is subsequently extended by more than 13 weeks because the employer has assigned the employee with temporary work.

An employee who does not receive the working notice required under the ESA must be given termination pay in lieu of notice. Termination pay is a lump sum payment equal to the?regular wages?for a?regular work week?that an employee would otherwise have been entitled to during their notice period. Vacation pay accrues on termination pay. Employers must also continue to make whatever contributions would be required to maintain the benefits during the notice period.

The amount of working notice or pay in lieu of notice under the ESA is based on years of service (as outlined below). In certain circumstances, the ESA also provides for severance pay for employees with more than 5 years’ service (as outlined below).

Calculating Statutory Notice Period or Pay in Lieu (caps out at 8 weeks)

A person is considered “employed” not only while they are actively working, but also during any time during which they are not working but the employment relationship still exists (for example, time in which the employee is off sick or on leave or on layoff). The amount of notice to which an employee is entitled depends on their “period of employment”. The period of employment includes not only all time while the employee is actively working but also any time that they are not working while the employment relationship still exists, subject to some exceptions.

Statutory Notice is based on Period of Employment

Less than 1 year (but at least 3 months) -1 week

1 year but less than 3 years - 2 weeks

3 years but less than 4 years - 3 weeks

4 years but less than 5 years - 4 weeks

5 years but less than 6 years - 5 weeks

6 years but less than 7 years - 6 weeks

7 years but less than 8 years - 7 weeks

8 years or more - 8 weeks

Note:?Special rules determine the amount of notice required in the case of mass terminations - where the employment of 50 or more employees is terminated at an employer’s establishment within a four-week period.

Requirements During the Statutory Notice Period

During the statutory notice period, an employer must:

·?????? not reduce the employee's wage rate or alter any other term or condition of their employment;

·?????? pay the employee the wages he or she is entitled to, which cannot be less than the employee's?regular wages?for a?regular work week?each week; and

·?????? continue to make whatever contributions would be required to maintain the employee's benefits plans until the end of the notice period.

Regular Rate: This is an employee's rate of pay for each non-overtime hour of work in the employee's work week.

Regular Wages: These are wages other than overtime pay, vacation pay, public holiday pay, premium pay, termination pay and severance pay and certain contractual entitlements.

Regular Work Week: For an employee who usually works the same number of hours every week, a regular work week is a week of that many hours, not including overtime hours. Some employees do not have a regular work week. That is, they do not work the same number of hours every week or they are paid on a basis other than time. For these employees, the “regular wages” for a “regular work week” is the average amount of the regular wages earned by the employee in the weeks in which the employee worked during the period of 12 weeks immediately preceding the date the notice was given.

Severance Pay (caps out at 26 weeks)

Under the ESA, when an employer has a payroll of at least $2.5 million, an employee who has been employed for five years or more are also entitled to severance pay. Payroll used to include Ontario payroll only, but now includes worldwide payroll, and in some case, the payroll of a related corporate group. Severance pay is calculated by multiplying the employee's regular wages for a regular work week by the sum of the number of completed years of service and the number of completed months of service divided by 12 for years that are not completed. Overall, an employee with 5 years or more of service is entitled to a week of severance pay per year of service, pro-rated for incomplete years, to a maximum of 26 weeks.

When Termination Pay and Severance Pay are Due?

Termination and severance pay must be paid to an employee?either?seven days after the employee’s employment is terminated or on the employee's next regular pay date, whichever is?later. An employer may pay the severance pay portion in installments if the employee agrees to this in writing.

Benefit Continuation

Pursuant to the ESA, Ontario employers must continue to fund any employee benefits for the statutory termination period. This can create a conflict with the terms of some benefit plans, particularly short and long-term disability insurance. Failure to maintain benefits can invalidate contractual termination provisions and make the employer liable for any lost benefits.

Common Law Notice

In the absence of a binding employment contract that sets out the terms the parties have agreed upon in the event of the termination of employment without cause, an employee is entitled to reasonable notice of termination of employment or pay in lieu of such notice. This common law requirement is in addition to the statutory minimum provided by the ESA. There is no prescribed formula to determine “reasonable notice” at common law.

The classic statement concerning the assessment of reasonable notice is set out in Bardal v. Globe & Mail Ltd.:

“There could be no catalogue laid down as to what was reasonable notice in particular cases. The reasonableness of the notice must be decided on with reference to each particular case having regard to:?

·?????? the character of the employment,

·?????? length of service,

·?????? age of the employee, and

·?????? availability of similar employment in light of the employee’s experience, training and qualifications.”

The state of the economy as it relates to re-employment prospects for the employee is also a factor to be considered in determining reasonable notice.

The Treatment of Incentive Compensation during the Notice Period

Employees in Ontario are often entitled to post-termination payment of incentive compensation (commission, bonus and deferred) during at least the statutory notice period and sometimes during the common law notice period. Whether incentive compensation is payable during these notice periods depends not only on the language of the relevant plan, but also on whether such compensation is determined to have become an integral part of the employee’s overall compensation. Courts have produced conflicting decisions on whether the language of an employer’s plan which limits an employee’s entitlement to post-termination compensation should always govern, particularly during the statutory notice period. Courts have also considered an employer’s decision to terminate and deny an employee a post-termination grant in the context of good faith and found such a decision could not stand when exercised to deliberately deny an employee compensation.

Other Considerations for Employers Prior to Termination

Before terminating an employee in Ontario, the employer should be familiar with their obligations, and potential restrictions under applicable legislation. Under the Ontario Human Rights Code, an employer must ensure that the reason for termination is not directly or indirectly connected to a prohibited ground of discrimination. There are also anti-reprisal or whistleblower protection rules under the ESA, Occupational Health and Safety Act, and Pay Transparency Act that may affect an employer’s ability to terminate an employee or be used as a basis for a claim by a dismissed employee.

Other Considerations for Employers Prior to Termination

Before terminating an employee in Ontario, the employer should be familiar with their obligations, and potential restrictions under applicable legislation. Under the Ontario Human Rights Code, an employer must ensure that the reason for termination is not directly or indirectly connected to a prohibited ground of discrimination. There are also anti-reprisal or whistleblower protection rules under the ESA, Occupational Health and Safety Act, and Pay Transparency Act that may affect an employer’s ability to terminate an employee or be used as a basis for a claim by a dismissed employee.

Key Take-Aways

When an employer obtains the necessary employment law advice about managing and terminating their workforce in Ontario, they will be better prepared from a business perspective and at less risk from a legal perspective.

Employment law is constantly evolving in Ontario, and in no area is this truer than termination of employment. Contact Eric Kay at [email protected] for advice on termination before starting the decision-making process..

DISCLAIMER:? This publication is for information purposes only and its provision does not form a lawyer-client relationship or constitute legal advice.