Originally published in Practical Law Company, 2010.
These questions have been answered using Ontario employment legislation, federal tax legislation (which applies across the country), and both Canadian federal and provincial corporate law references.
1. What level of statutory employment protection do employees receive in your jurisdiction? Are there provisions of "mandatory law" that apply to all workers in your jurisdiction, regardless of the choice of law in the employment contract and the identity, place of incorporation or location of the employing entity?
Statutory employment protection. There are several provincial laws relating to employees and employment practices, including:
- Employment standards (in Ontario, the Employment Standards Act 2000 (ESA)).
- Workplace health and safety (in Ontario, the Occupational Health and Safety Act 1990).
- Human rights (in Ontario, the Human Rights Code 1990).
- Labour relations (in Ontario, the Labour Relations Act 1995).
- Pay equity (in Ontario, the Pay Equity Act 1990).
Employment equity legislation is also applicable to employees in a federally regulated business.
The ESA applies to an employment relationship if the employee's work is to be performed in Ontario, or if the employee's work is to be performed both inside and outside of Ontario but the work performed outside Ontario is a continuation of work performed in Ontario (section 3(1), ESA). This legislation does not apply to an employment relationship that is within the jurisdiction of the Parliament of Canada or other provinces. There are several other exceptions, including students participating in work experience programmes (section 3, ESA).
Mandatory law. No employer (or agent of an employer) and no employee (or agent of an employee) can contract out of or waive a legislated minimum employment standard (section 5(1), ESA). Any waiver or contracting out of the ESA is void. However, if provisions in an employment contract or another statute provide a greater benefit to an employee than the legislated employment standard, then those provisions apply (section 5(2), ESA).
2. Please give details of the following in your jurisdiction (if applicable):
- Maximum working week.
- Minimum wage.
- Minimum holiday entitlement.
- Maximum working week. An employee cannot work more than eight hours a day unless the employer and employee agree to exceed this limit (section 17(1), ESA). The legislated maximum working week is 48 hours, but the employee and employer can also agree to exceed this limit (section 17(1), ESA). Such an agreement must specify the number of hours in the employee's regular work day, and the hours worked cannot exceed that agreed-upon limit (section 17(2), ESA). To vary the weekly limit the employer must receive approval from the Ontario Director of Employment Standards, and the employee's number of hours worked in a week cannot exceed the lesser of (section 17(3), ESA):
- the number of hours specified in the agreement; and
- the number of hours specified in the approval.
- Minimum wage. The prescribed minimum wage for most employees in Ontario is $10.25 an hour (section 5(1.3), Ontario Regulation 285/01) (as at 1 September 2010, C$1 was EUR0.74). There are some exceptions to this (for example, the minimum wage for some employees who are students under 18 years of age is C$9.60 an hour).
- Minimum holiday entitlement. Employees must receive at least two weeks' vacation time after completing each vacation entitlement year (each 12-month period of employment, starting the day an employee is hired, unless the employer has designated an alternate time period) (section 33(1), ESA). Employees who are entitled to vacation time must receive vacation pay equal to at least 4% of the wages that were earned during the period for which vacation is given. For example, an employee that earns C$16,000 gross wages in the vacation entitlement year is entitled to C$640 of vacation pay (section 35.2, ESA).
3. What statutory rights do workers have against dismissal in your jurisdiction?
Employers cannot terminate the employment of an employee who has been continuously employed for three months or more, except on written notice of the termination in accordance with legislated requirements (section 54, ESA).
The requirements for the amount of notice required on an individual employee's termination of employment are (section 57, ESA):
- Less than three months' employment: no notice required.
- Employment of three months or more, but less than one year: one week's notice required.
- Employment of one year or more, but less than three years: two weeks' notice required.
- Employment of three years or more, but less than four years: three weeks' notice required.
- Employment of four years or more, but less than five years: four weeks' notice required.
- Employment of five years or more, but less than six years: five weeks' notice required.
- Employment of six years or more, but less than seven years: six weeks' notice required.
- Employment of seven years or more, but less than eight years: seven weeks' notice required.
- Employment of eight years or more: eight weeks' notice required.
There are additional notice requirements when a large employer dismisses groups of 50 or more employees within the same four-week period (section 58, ESA).
Employees can be terminated without notice (or with less notice than is required by statute) if they are paid a sum equal to the amount they would have received if the appropriate notice had been given (section 61, ESA). In addition, employers must continue to make any benefit plan contributions to which employees would have been entitled if they had continued to be employed during the statutory notice period.
The Ontario Human Rights Code states that "every person has a right to equal treatment with respect to employment without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offences, marital status, family status or disability" (section 5(1)). Accordingly, employees cannot be dismissed for reasons related to these prohibited grounds of discrimination.
4. What rights do workers have to be consulted or participate in the management of companies incorporated in your jurisdiction? (In particular do they have to be consulted in relation to redundancies or disposals)?
Workers have limited rights to be consulted or participate in the management of companies incorporated in Ontario. They can negotiate for contractual rights to be consulted or to participate in the management of their employer (although this is rare). In addition, workers can generally choose to join and participate in any existing trade union or employers' organisation (sections 5 and 6, Labour Relations Act).
5. What is the basis of taxation of employment income in your jurisdiction? Please distinguish between foreign nationals working in your jurisdiction and nationals of your jurisdiction working abroad.
The basis of Canadian taxation is residency. An individual is taxed in Canada on employment income if he is a resident (or deemed resident) of Canada (sections 2(1) and 250, Income Tax Act 1985 (ITA)). Canadian residents working abroad are taxed in Canada on income from all sources worldwide, subject to the foreign tax credit (section 126, ITA) and any tax treaties.
In relation to foreign nationals working in Canada, non-resident persons are subject to Canadian tax on income earned in Canada. Non-resident employees who are in continuous and regular employment in Canada are subject to the same tax deductions as Canadian residents.
Payments to non-residents for services provided in Canada that are not performed in the ordinary course of employment are subject to withholding tax. Anyone who pays a non-resident other than an employee for services provided in Canada must withhold and remit an amount in accordance with the Regulations to the Income Tax Act (ITA Regulations) (section 153(1), ITA and section 105, ITA Regulations). The rate of withholding is 15% of the gross amount paid. The withholding tax is considered a payment on account of the non-resident's overall tax liability to Canada. Where a non-resident can adequately demonstrate that the required withholding tax is in excess of his ultimate Canadian tax liability, the Canada Revenue Agency may reduce or waive the withholding tax accordingly.
Note that income taxed twice in different jurisdictions can be reduced by bilateral treaties.
6. What is the rate of tax on employment income? Are any other taxes (such as social security contributions) levied on the employment relationship?
The federal tax rates for 2010 are:
- 15% on the first C$40,970 of taxable income.
- 22% on the next C$40,971 of taxable income (that is, on the portion of taxable income between C$40,970 and C$81,941).
- 26% on the next C$45,080 of taxable income (that is, on the portion of taxable income between C$81,941 and C$127,021).
- 29% on taxable income over C$127, 021.
The Ontario tax rates for 2010 are:
- 5.05% on the first C$37,106 of taxable income.
- 9.15% on the next C$37,108.
- 11.16% on the amount over C$74,214.
There are several social security contributions levied on the employment relationship, namely Canada Pension Plan contributions and Employment Insurance, which are normally deducted from an employee's remuneration. With a few exceptions, employers must pay an Employer Health Tax, which is directly related to the remuneration of its employees (Employer Health Tax Act 1990).
7. If an individual employee agrees to transfer employment to a new entity, should any formalities be followed to prevent the employee from later bringing a claim in respect of termination of employment? (Assume that the transfer is not part of a transfer of a business as a going concern.)
If an individual employee agrees to transfer employment to a new entity as part of a corporate asset transfer, the transfer is valid as long as the total compensation is comparable in the aggregate. An employer cannot change the employment contract unilaterally. As a result, the contract remains binding unless the change can be implied or is implicit in the relationship (that is, a contract changed in writing or by express communication). If the contract is unilaterally changed, this may amount to a fundamental breach of the contract and, if so, give rise to a constructive dismissal claim (Hill v Peter Gorman Ltd (1957), 9 DLR (2) 124 (Ont CA)).
8. What benefits (if any) does a period of continuous employment bring for an employee in your jurisdiction? If an individual employee is transferred to a new entity, in what circumstances (if any) will the employee be deemed to retain his continuous period of employment? (Assume that the transfer is not part of a transfer of a business as a going concern.)
An employee retains certain rights when the business for which he works is sold or otherwise transferred to a new owner and the employee continues to work in the business for the new owner. A person's length of employment with the seller of a business transfers to the buyer. As a result, an employee's entitlement to rights based on length of employment are unchanged despite the sale of a business. There is an exception to this continuity of employment protection if there is a 13-week gap in employment after the sale of a business (Part IV, ESA).
9. What, if any, remedies are available to an employer if an employee refuses to transfer to a joint venture entity? (Assume that the transfer is not part of a transfer of a business as a going concern.)
An employee cannot be compelled to transfer to a new entity. However, when an employee is transferred to a new entity he is in effect first dismissed by the previous entity, and then instantaneously hired by the new entity. This ensures that there is no gap in employment and that the transfer is considered deemed continuity of employment (section 9, ESA).
If the employee refuses to accept the transfer, he is in effect dismissed and can claim damages if the employer did not offer comparable employment in the new entity. However, damages can be reduced if the employee has not mitigated his losses (by, for example, accepting an offer of comparable employment or searching for alternative jobs).
10. If a business is transferred from a joint venture party to the joint venture entity, is there any statutory protection of employees working in the business? In particular:
- Are they automatically transferred with the business?
- Are they protected against dismissal?
- Do they need to be consulted?
Automatic transfer. Employees transferred to a new business entity (or joint venture) are in effect instantaneously dismissed by the old entity and hired by the new entity. This results in a deemed continuity that ensures there is no gap in employment.
If an employer sells a business (or a part of a business) and the buyer employs an employee of the seller, the employment of the employee is deemed not to have been terminated. His employment with the seller is deemed to have been employment with the buyer for the purpose of any subsequent calculation of the employee's length of service (section 9(1), ESA).
Protection against dismissal. Employees have the same protection against dismissal as they did under their previous employment contract with their original employer.
Consultation. Employees do not need to be consulted if a business is transferred to a joint venture entity unless they have contracted for consultation rights via an established union (that is, in the collective bargaining agreement).
11. If employees are transferred to a joint venture entity by different parties, are there any legal restrictions on harmonising their terms of employment?
An employee's new terms of employment must not be materially less than his previous terms of employment. Otherwise, the employee may have a claim for constructive dismissal. Such a claim would be based on the employee's contract being fundamentally changed without his approval.
12. Are there any restrictions in your jurisdiction on an employer seconding an employee to another organisation on a temporary basis?
There are no restrictions on an employer seconding an employee to another organisation on a temporary basis. It is common for the employers to draft an agreement that defines the type of employment for the secondment. The original employer can decide to keep the seconded employee on its payroll and be paid a fee by the organisation to which the employee is seconded. Another option is for the employee to take a leave of absence from the original employer and work for the new organisation as its consultant or employee.
13. Does an employer that seconds an employee to another organisation remain vicariously liable for the acts of the employee (even if the employee is acting in accordance with instructions from the other organisation)?
A person may be the employee of one employer and at the same time a temporary employee of another employer for a particular matter. To determine employer liability, the court must determine whether the borrowed employee is the employee of the general employer or the temporary employer when the tort was committed.
For the temporary employer to be liable it must be able to direct what the employee does and how he does it. The "entire and absolute control" must pass from the general employer to the temporary employer. There is a heavy burden on the general employer to shift liability to the temporary employer and prove prima facie that the temporary employer was responsible for the tortious conduct of the employee (Mersey Docks and Harbour Board v Coggins and Griffith (Liverpool) Ltd,  AC1,  2 All ER 345 (HL)).
14. If an employee creates intellectual property rights in the course of his employment, who owns the rights? Would the answer be any different if the employee is seconded to another organisation when the rights are created?
Whether an employee owns intellectual property rights created in the course of employment depends on the type of employment and the employment contract. If the employee has been hired for the purpose of creating intellectual property, then a provision is usually included in the employment contract stating that the intellectual property belongs to the employer. If the employee has not been hired for the purpose of creating intellectual property, then he may be entitled to ownership of the intellectual property rights, depending on the terms of the employment contract.
If an employee is seconded to another organisation when the rights are created, ownership of intellectual property rights similarly depends on the terms of the secondment arrangement.
15. How are fees for seconded employees taxed in the hands of the employing company? Does value added tax apply to secondment fees?
If an employee seconded to Canada remains on a foreign lending employer's payroll, then the lending employer may charge a Canadian receiving employer for the reimbursement costs associated with the secondment. In this case, the foreign lending employer could expose itself to Canadian tax liability and withholding tax issues.
Normally, fees paid to foreign lending employers for seconded employees might constitute a non-resident payment that is subject to withholding tax (ITA Regulations).
However, the withholding requirement does not apply to reasonable reimbursement fees if the secondment is properly structured in accordance with Canada Revenue Agency (CRA) guidelines (paragraph 37, Canada Revenue Agency, Income Tax Information Circular 75-6R2).
The CRA may consider a profit mark-up or unreasonable charges to be the lending employer carrying on business in Canada, and amounts attributable to carrying on business in Canada are subject to Canadian tax (paragraph 39, Canada Revenue Agency, Income Tax Information Circular 75-6R2).
Secondment fees paid by foreign companies to Canadian companies may be subject to withholding tax in the foreign jurisdiction, which may or may not be alleviated by treaties or other agreements.
If the employee is properly seconded then there is no value added tax applied (that is, no goods and services tax). However, fees for services would be subject to applicable goods and services taxes.
16. Is it common (or compulsory) for employees to participate in private pension schemes established by their employing company? Are any tax reliefs available on contributions to such schemes (by the employing company and employees)?
It is common for employees to participate in private pension plans established by their employing company if that employer is a large company. Establishing a pension plan is a voluntary undertaking, so small to mid-size employers are less likely to establish one.
Pension plans registered under the ITA receive substantial taxassisted treatment, and employee and employer contributions to registered pension plans receive tax-deferred advantages. Some of the main tax advantages of registered plans are:
- An employer's contribution to the pension plan is not included as a benefit in the calculation of the employee's employment income.
- Employer and employee contributions to a registered pension plan are tax deductible for the year in which the contributions are made.
- The investment income earned by the pension plan and the pension fund is exempt from tax.
- The funds accumulated and invested in the plan on a tax-free basis only begin to be taxed when an employee withdraws money from the plan on a non-locked-in basis (section 118(3), ITA).
17. Can employees that are working abroad and employees of a subsidiary company in a different country participate in a pension scheme established by a parent company? Are the same tax reliefs referred to in Question 16 still available in these circumstances?
Employees working abroad and employees of a subsidiary company in a different country can participate in a pension plan established by a parent company as long as they continue to work for the parent company that sponsors the plan. The employees cannot continue to participate in the pension plan if they are working for a new entity in a different country and do not continue to be on the parent company's payroll.
Where an employee has not resided in Canada for at least two years, he is considered a non-resident and the full cash value of his pension benefits may be commuted and withdrawn by the employer in cash. Non-residents are not normally eligible for federal or provincially-sponsored social welfare benefits (sections 5 and 7, Employment Insurance Act 1996 and section 3(a), Ontario Works Act 1997).
Tax relief relates to residency. As a result, if the employees are residents of a different country, they are taxed under the laws of that country and the tax relief for claiming private pension income may not be available.
18. If an employee is transferred as part of a business, is the transferee under an obligation to honour existing pension rights or provide equivalent rights?
In an asset-purchase transaction, the seller's pension plan is not necessarily transferred to the buyer. The negotiations may address whether the buyer will continue to offer a pension plan to the transferred employees. If the buyer decides to offer a pension plan, it has several options available, including to:
- Assume the seller's pension plan.
- Get the transferred employees to participate in a new or existing pension plan offered by the buyer (which must be substantially similar to the previous plan).
In a share-purchase transaction, the buyer assumes all the obligations and liabilities of the purchased business. Therefore, all rights and obligations, including those related to pensions, stay the same.
19. Are employee share option schemes common in your jurisdiction? If so, are there any tax benefits and can options be granted to employees of group companies?
Employee share option plans are common in Ontario and several types of stock purchase plans are common in Canada. Stock purchase plans can be combinations of employee ownership and equity plans. The most well-known scheme is stock options. Restrictions on the stock option exercise price vary, and depend on whether the company is publicly traded (and bound by the requirements of a particular stock exchange) or privately held (Perspectives on Labour and Income, Taking stock of equity compensation, Statistics Canada).
Specific rules govern the tax consequences for both the employee and for a corporate employer (or a company with which the employer does not deal at arm's length) that has "agreed to sell or issue" shares of the company to the employee (section 7, ITA). Under these rules, an employee is not taxed on the grant of a stock option.
In general, when a stock option is exercised, the employee is taxed on the excess of the then fair market value of the shares over the exercise price (this difference is referred to as the Stock Option Benefit). If the exercise price of the option is not less than the fair market value of the shares at the time the option was granted, the employee is entitled to deduct from income one-half of the Stock Option Benefit, meaning that the Stock Option Benefit is in effect taxed as a capital gain because only 50% of the benefit is included as income.
Under these rules, an employer is not entitled to a deduction in respect of shares issued or transferred to an employee to satisfy stock option exercises.
20. If an employee who participates in a share option scheme is transferred as part of a business, is the transferee under an obligation to provide an equivalent scheme? If so, how is this dealt with in practice?
In an asset-purchase transaction, the transferee must provide total compensation that is substantially similar in the aggregate to the employee's previous total compensation. In practice, a new business usually sets up a new share option scheme and/or pension plan, or gives the transferring employees another type of benefit.
In a share-purchase transaction, everything stays the same, including any share option schemes.
21. Do foreign nationals require work permits and, if so, how difficult are they to obtain and how long does the process take?
People who want to work and are not Canadian citizens or permanent residents of Canada must apply for a work permit. A temporary visa may also be required. The process can take from approximately one to several months, depending on the type of permit application submitted. Canada has also established an immigration points system, which uses six factors to assess who may qualify as "skilled workers" to be selected as permanent residents (Citizenship and Immigration Canada, Skilled workers and professionals: Self-assessment test, www.cic.gc.ca/english/immigrate/skilled/assess/index.asp ).
22. Are there any restrictions on foreign managers or directors for companies in your jurisdiction?
At least 25% of the directors of a resident company must be resident Canadians. Where a company has less than four directors, at least one director must be a resident Canadian (section 118(3), Business Corporations Act 1990 and section 105(3), Canada Business Corporations Act 1985 (CBCA)).
If a federally incorporated company engages in an activity in Canada in a prescribed business sector or is otherwise required by statute to have a specified level of Canadian ownership or control, then a majority of the directors of the company must be resident Canadians (section 105(3.1), CBCA).
23. Are there any circumstances in which directors or managers can be personally liable in respect of the actions of a joint venture company that is incorporated in your jurisdiction?
A person who enters into (or purports to enter into) a written contract in the name of (or on behalf of) a company before it comes into existence is personally bound by the contract and is entitled to its benefits, unless it is expressly provided in the written contract that the person is not liable (section 14, CBCA).
Directors of a company can be personally liable for circumstances such as the issuance of dividends when the company is insolvent or the sale of shares for less than they are worth (section 118, CBCA). Directors can also be liable for up to six months' worth of employee wages, which helps to ensure that employees are properly paid (section 119, CBCA).
Subject to these specific examples, shareholders and directors have limited liability. This concept was ingrained in corporate law in the UK case of Salomon v Salomon ( AC 22 (HL)), which continues to be relevant in Canada
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.