Canada: Recent Ontario Decision Casts Doubt On Statutory Severance Pay Threshold

In Ontario, employees are entitled to notice of termination or pay in lieu of notice of termination in accordance with the Employment Standards Act, 2000 (the "ESA"). In addition, employees with five years of service or more who work for an employer with an annual payroll of at least $2.5 million are also entitled to statutory severance pay upon termination pursuant to the ESA. Section 64(2) of the ESA specifically outlines how to assess whether the $2.5 million payroll threshold has been met:

  1. For the purposes of subsection (1), an employer shall be considered to have a payroll of $2.5 million or more if,

    1. the total wages earned by all of the employer's employees in the four weeks that ended with the last day of the last pay period completed prior to the severance of an employee's employment, when multiplied by 13, was $2.5 million or more; or
    2. the total wages earned by all of the employer's employees in the last or second-last fiscal year of the employer prior to the severance of an employee's employment was $2.5 million or more.

Although section 64(2) of the ESA does not explicitly limit the assessment to an employer's Ontario payroll, historically the judicial interpretation has been that only the payroll of the employer arising out of its operations in Ontario shall be included in the calculation of the employer's payroll for the purposes of the ESA. As such, the payroll for employees in all other Canadian jurisdictions has not been considered when determining an employer's severance pay liability. This interpretation was endorsed by Ontario's Superior Court of Justice in Altman v. Steve's Music, a 2011 decision. It has also been consistently endorsed by the Ontario Ministry of Labour in its Employment Standards Act, 2000 - Policy and Interpretation Manual as well as the Ontario Labour Relations Board.

However, a recent French-language decision of Ontario's Superior Court of Justice has rendered the traditional interpretation uncertain by enunciating a completely different approach, one which may have a significant impact on the obligations of employers at the time of termination. In Paquette v. Quadraspec Inc. , an employee with more than 26 years of service brought a motion after his employment was terminated on a without cause basis. It was the employee's position that in addition to notice or pay in lieu of notice pursuant to the ESA, he was also entitled to statutory severance pay. The employer disagreed on the basis that it had an Ontario payroll that was less than $2.5 million.

One issue before the Court was whether the words "in Ontario" should be read into the severance pay provisions of the ESA. The Court concluded that the words "in Ontario" should not be read in. Rather, an employer's total Canadian payroll, both inside and outside of Ontario, ought to be included when determining whether the $2.5 million threshold is met. In the case of Paquette, the employer's Ontario payroll, which was only $1.5 million, was combined with its Quebec payroll, which was approximately $3 million, thereby rendering the employer in this case liable for statutory severance pay.

If the Paquette decision is upheld, or if it is followed by the Ontario Labour Relations Board or the Ontario Ministry of Labour, it will have significant consequences for certain employers that have operations in Ontario and other jurisdictions. It may even mean that a U.S. corporation with only one employee in Ontario may be liable for severance pay if the employer terminates that employee's employment and he or she has more than five years of service.

Until we receive clarity from an appellate court, employers may proceed using the traditional approach, but in doing so they should be aware that based on the decision in Paquette, there is a potential liability for statutory severance pay should their total payroll exceed $2.5 million. More specifically, it may increase an employer's exposure for statutory severance pay of one week of severance for every year of service (prorated for partial years of service) up to a maximum of 26 weeks.

We will continue to monitor the Paquette decision in respect of any future appeals, as well as the application of this decision in future proceedings before the Ontario Ministry of Labour and the Ontario Labour Relations Board, and any similar wrongful dismissal proceedings in the Ontario Superior Court of Justice. We will provide updates as they become available

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.

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