Canada: Where Is The Line? Extra-Provincial Payroll May Affect Ontario Severance Pay

More Ontario employers may face liability for severance pay after a recent decision cast doubt on the meaning of "payroll" under the Employment Standards Act, 2000 (the "ESA"). On April 17, 2014, the Ontario Superior Court of Justice released Paquette v Quadraspec Inc. ("Paquette"), a French language decision that is largely inconsistent with previous practice and case law.

Departure from Preceding Practice and Case Law

Where an employer's annual payroll is larger than $2.5 million, an employee with at least five years of service is entitled to severance pay. At issue in Paquette was whether or not the court should consider payroll outside of Ontario when determining the size of an employer's payroll. Quadraspec's Ontario payroll did not meet the $2.5 million threshold on its own but, when combined with their Québec payroll, it did.

Prior to Paquette, the $2.5 million threshold applied only to Ontario payroll. This view was consistently endorsed by the Ontario Ministry of Labour and Ontario Labour Relations Board, and was applied as recently as the 2011 decision of the Ontario Superior Court of Justice in Altman v Steve's Music.

In Paquette, Justice Paul Kane compared the language in the ESA to the language in the Pay Equity Act, where "payroll" is explicitly defined as the "total wages and salaries paid to employees of the employer in Ontario [emphasis added]." Justice Kane found that if a similar intention had been present in drafting the ESA provisions, Parliament would have expressed such an intent clearly.

Impact on Employer Obligations

The implications of this reasoning could be significant for employers in Ontario with operations elsewhere. If payroll is not restricted to Ontario, where does the new boundary lie? Of particular concern is the potential impact on employers who not only have operations in other provinces but also have international operations. A large company with only one employee in Ontario could now face severance obligations if they terminate that employee. This could translate to an unexpected financial obligation of up to 26 weeks of pay (one week's worth for every year of employment), which may amount to a significant figure.

Further, employers may have to think twice when applying the terms of employment agreements that restrict entitlements on termination to ESA minimums. Employers may lose the benefit of these agreements if they fail to pay severance pay because their Ontario payroll is less than $2.5 million, but the threshold is met when national or international payroll is included.

Given that the decision deviates from established jurisprudence and practice, the issue will likely need to be dealt with on appeal. We will also need to see whether the position of the Ontario Ministry of Labour and the Labour Relations Board will change as a result of this decision. In the interim, it will be important for employers to track the progression of the case.

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