Saturday, 27 May 2017

Mo Money Mo Problems (A Review of Termination Pay Obligations for Large Payrolls)

On May 27, 2017, I presented a paper to the County of Carleton Law Association’s annual solicitor’s conference titled “Mo Money Mo Problems (A Review of Termination Pay Obligations for Large Payrolls).” What follows is a copy of that paper.

I can think of no better way to introduce the subject of termination pay obligations for large payrolls than the lyrical hook to the song Mo Money Mo Problems by artist The Notorious B.I.G.:

I don't know what, they want from me

It's like the more money we come across

The more problems we see

The purpose of this paper is to canvass the subject of the obligation to pay statutory severance pay. As will be explained more fully below, pursuant to the provisions of section 64 of the Ontario Employment Standards Act, 2000, it is patently obvious that, notwithstanding anything Ol’ Dirty Bastard may have said about the subject, [“Look here, more money, more problems, my ass / You'se a naive cat, if you still believe that …”] the more money that employers come across, the more problems they’ll see.

The Semantics of Statutory Severance

The semantics of termination pay in Ontario are painfully confusing for those who do not regularly practice in this area. In the Employment Standards Act, 2000 (hereinafter the “ESA”), “severance pay” has a specific defined meaning. This word choice is confusing because employees who are not entitled to such statutory “severance pay” may still be entitled to significant pay in lieu of notice, which is habitually referred to as ‘severance pay.’ For the purposes of this paper, any reference to “severance pay” will mean statutory severance pay as defined by Part XV of the ESA.

To make matters even more complicated, paragraphs 13 and 14 of section 74.11 of the ESA prescribe the conditions under which “severance pay” must be paid to an assignment employee of a temporary help agency. This paper will focus exclusively on the Part XV obligations.

Obligation to Pay Severance Pay

Part XV of the ESA and sections 63-66 in particular enumerate the conditions under which severance pay must be paid to employees other than “assignment employees” of “temporary help agencies.”

Of critical importance to this paper is section 64 of the ESA, which provides as follows:

64. (1) An employer who severs an employment relationship with an employee shall pay severance pay to the employee if the employee was employed by the employer for five years or more and,

(a) the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or

(b) the employer has a payroll of $2.5 million or more.

While it is important to highlight the criterion that the employee be employed by the employer for five years or more, the specifics of what qualifies as such employment are beyond the scope of this paper. Similarly, while section 63 of the ESA prescribes what constitutes a severance of employment, this paper will focus exclusively on the payroll criterion established in paragraph 1(b) of section 64.

Determining Whether the Employer Meets the Payroll Criterion

Subsection 64(2) of the ESA provides that, for the purposes of paragraph (1)(b) of section 64, an employer shall be considered to have a payroll of $2.5 million or more if:

(a) 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

(b) 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.

The Decision in Paquette c. Quadraspec Inc., 2014 ONCS 2431

Prior to the decision of the Honourable Justice Paul Kane of the Ontario Superior Court of Justice in Paquette c. Quadraspec Inc., 2014 ONCS 2431 common knowledge was that for the purposes of making any calculations concerning severance pay, it was only an employer’s Ontario payroll that was to be considered.

For example, in the case of Altman v. Steve’s Music, 2011 ONSC 1480 the Honourable Justice Corrick, also of the Ontario Superior Court of Justice, held that:

[33] Steve’s Music has operations in Ontario and Quebec. The issue before me is whether the payroll of Steve’s employees in Quebec should be included in the determination of the payroll under s. 64(1)(b). The evidence is that the Ontario payroll is $2.1 million. If the Quebec payroll is included, the total exceeds $2.5 million.

[34] In the case of Northern Superior Supply Co., the Ontario Labour Relations Board held that only the payroll of an employer’s operation in Ontario is relevant to s. 64(1)(b). The Board held that Ontario has legislative authority with respect to businesses operating in Ontario and has no authority to legislate concerning payrolls in other provinces.

[35] The Board relied on the decision of the Divisional Court in Tullett and Tokyo Forex (Canada) Ltd. v. Singer in which the court held that an employee of a Canadian subsidiary of a U.S. company who had worked four years for the U.S. company, and two years in Ontario for the Canadian subsidiary, was not entitled to severance pay because he had not worked in Ontario for more than five years. The court held that the provision in the Act was directed to Ontario based employment. Similar rulings have been made in other cases.

[36] Ms. Altman is not entitled to severance pay given that Steve’s payroll for its Ontario operations is less than $2.5 million.

Things changed, however, with Justice Kane’s decision. Writing his reasons for decision in French, Justice Kane wrote on this point:

[66] L’article 64 ne prévoit aucunement que la législature ontarienne régisse les « masses salariales des autres provinces ». La législature possède la compétence à légiférer en matière des affaires des employeurs qui mènent des activités en Ontario et y engagent des personnes. Les exigences imposées aux employeurs par et dans les autres juridictions ne font pas l’objet ni la visée de l’article 64.

[67] La législature ontarienne détient le pouvoir législatif pour adopter la mesure qui sera utilisée dans l’application d’une loi en Ontario, plus précisément, quels employeurs ontariens ont l’obligation de verser une indemnité de départ. L’application est prévue à l’article 64 selon la taille de l’employeur et de ses effectifs ou de sa masse salariale. La mesure et l’applicabilité de l’obligation sont établies selon le « total des salaires gagnés par tous les employés de l’employeur ». Le libellé de la Loi est clair. La mesure correspond aux salaires versés par l’employeur et à l’intérieur et à l’extérieur de l’Ontario. Il n’y aucune justification légale ou compétence pour interpréter ces articles de sorte à insérer des restrictions qui ne se trouvent pas dans la Loi.

[68] Dans son interprétation et sa conclusion dans l’arrêt Altman c. Steve’s Music Store Inc. 2011 ONSC 1480 (CanLII), paragraphes 32 à 36, en ce qui a trait à l’article 64 de la Loi, le tribunal se fonde explicitement sur les arrêts Tullett, et Northland, et ne fait aucune analyse de la question. En toute déférence, je ne souscris pas à cette conclusion, compte tenu de l’analyse mentionnée précédemment.

When the case was subsequently reported in the Ontario Reports, [ 121 OR (3d) 765] the translation of those paragraphs was as follows:

[66] In no way does s. 64 provide that the Ontario legislature govern “payrolls in other provinces”. The legislature is empowered to legislate with respect to employers with businesses operating in Ontario and that hire people in that province. Section 64 does not concern, nor is it directed at, requirements placed upon employers by and in other jurisdictions.

[67] The Ontario legislature holds the legislative authority to adopt the measure which will be used in applying the law in Ontario, specifically, which employers operating in Ontario have the obligation to provide severance pay. The application is provided in s. 64 according to employer size, number of employees or payroll. The measure and applicability of the obligation are established by “total wages earned by all of the employer’s employees”. The Act is worded clearly. The measure relates to wages paid by the employer in and outside of Ontario. There is no legal justification or authority to interpret these sections so as to insert restrictions that are not to be found in the Act.

[68] In the interpretation and conclusion in Altman v. Steve’s Music Store Inc., [2011] O.J. No. 1136, 2011 ONSC 1480 (S.C.J.), paras. 32-36, regarding s. 64 of the Act, the court relies on the above-mentioned decisions in Tullett and Northland, and provides no assessment of the issue. With all due respect, I disagree with this conclusion, in light of the above-mentioned assessment.

On my blog, I wrote the following about this decision in a post titled “ The Requirement to Pay Severance in Ontario - The Decision in Paquette c. Quadraspec Inc., 2014 ONCS 2431”:

The change in the approach to the law could be huge for foreign-to-Ontario employers. Consider, for example, an employee earning $52,000 a year in base salary. If the employee has been employed by his employer for 10 years, here is what the change in the approach to the law means.

Under the old approach, the employee would be entitled to no less than eight weeks of statutory notice. … That notice could be provided as working notice, meaning that the employee would be obligated to work for his employer until the set date provided in the notice. If the employer’s total payroll with respect to its Ontario operations was less than $2.5 million, then the employee would not be entitled to anything further – subject to any common law rights to increased notice.

Under the new approach, however, even after satisfying the employee’s notice entitlements, the employee would still be entitled to a severance payment if the employer’s total payroll, including its employees outside of Ontario, exceeded the statutory threshold. In this example, the employee’s entitlement would be 10 weeks x $1,000/week base salary = $10,000!

Of course, if the employee had been employed for 15 years, the entitlement would be $15,000. If the employee’s salary was higher, say $104,000 per year for easy math, then the entitlements would be doubled.

All of this has the very real potential to increase employer’s contingent labour costs.

All that is, of course, correct and provides an excellent segue into the subject of calculating and making the severance payment.

Calculating and Making the Severance Payment

Section 65 of the ESA prescribes the method by which severance pay is to be calculated:

65. (1) Severance pay under this section shall be calculated by multiplying the employee’s regular wages for a regular work week by the sum of,

(a) the number of years of employment the employee has completed; and

(b) the number of months of employment not included in clause (a) that the employee has completed, divided by 12.

(2) All time spent by the employee in the employer’s employ, whether or not continuous and whether or not active, shall be included in determining whether he or she is eligible for severance pay under subsection 64 (1) and in calculating his or her severance pay under subsection (1).

(2.1) Despite subsection (2), when an employee in receipt of an actuarially unreduced pension benefit has his or her employment severed by an employer on or after November 6, 2009, time spent in the employer’s employ for which the employee received service credits in the calculation of that benefit shall not be included in determining whether he or she is eligible for severance pay under subsection 64 (1) and in calculating his or her severance pay under subsection (1).

(3) If an employee’s employment is severed under clause 63 (1) (e), the period between the day the employee’s notice of resignation took effect and the day the employer’s notice of termination would have taken effect shall not be considered in calculating the amount of severance pay to which the employee is entitled.

(4) If an employer terminates the employment of an employee without providing the notice, if any, required under section 57 or 58, the amount of severance pay to which the employee is entitled shall be calculated as if the employee continued to be employed for a period equal to the period of notice that should have been given and was not.

(6) For the purposes of subsections (1) and (5), if the employee does not have a regular work week or if the employee is paid on a basis other than time, the employee’s regular wages for a regular work week shall be deemed to be the average amount of regular wages earned by the employee for the weeks in which the employee worked in the period of 12 weeks preceding the date on which,

(a) the employee’s employment was severed; or

(b) if the employee’s employment was severed under clause 63 (1) (c) or (d), the date on which the lay-off began.

Simply stated, in the usual case, the amount of severance pay will be equal to one week per year of service, plus one-twelfth of a week for every completed month of service. For example, an employee employed for a period of 5 years and 6 months, and two weeks would be entitled to 5.5 weeks of severance.

Pursuant to subsection 65(5), the limit on severance pay is 26 weeks, regardless of the number of years the employee has spent in employment.

It is important to note that, unlike the obligation to provide notice of termination, which may be provided as ‘working notice’, subsection 65(7) dictates that, subject to subsection (8), severance pay must be provided as cash, and is in addition to any other amount to which an employee is entitled under the ESA or his or her employment contract.

Subsection 65(8) prescribes that only the following set-offs and deductions may be made in calculating severance pay under this section:

1. Supplementary unemployment benefits the employee receives after his or her employment is severed and before the severance pay becomes payable to the employee.

2. An amount paid to an employee for loss of employment under a provision of the employment contract if it is based upon length of employment, length of service or seniority.

3. Severance pay that was previously paid to the employee under this Act, a predecessor of this Act or a contractual provision described in paragraph 2.

Generally, an employer must provide the dismissed employee with his or her severance pay not later than the later of: (a) seven days after the employment ends; and (b) the day that would have been the employee’s next pay day.

However, notwithstanding the general obligation established by subsection 11(5), pursuant to section 66 of the ESA, an employer may pay severance pay to an employee who is entitled to it in instalments, but only with the agreement of the employee or the approval of the Director of Employment Standards. The period over which instalments can be paid must not exceed three years and if the employer fails to make an instalment payment, all severance pay not previously paid shall become payable immediately.

Exemptions

Section 9 of Ontario Regulation 288/01 enumerates the employees who are prescribed for the purposes of subsection 64 (3) of the ESA as employees who are not entitled to severance pay. Those employees are as follows:

1. An employee whose employment is severed as a result of a permanent discontinuance of all or part of the employer’s business that the employer establishes was caused by the economic consequences of a strike.

2. Subject to subsection (2), an employee whose contract of employment has become impossible to perform or has been frustrated.

3. An employee who, on having his or her employment severed, retires and receives an actuarially unreduced pension benefit that reflects any service credits which the employee, had the employment not been severed, would have been expected to have earned in the normal course of events for purposes of the pension plan.

4. An employee whose employment is severed after refusing an offer of reasonable alternative employment with the employer.

5. An employee whose employment is severed after refusing reasonable alternative employment made available through a seniority system.

6. An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.

7. A construction employee.

8. An employee engaged in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works.

Of those exemptions, the most common will be those employees who are “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”, i.e. those employees whose employment is terminated “for cause”. Although, as the decision of Justice Pierre Roger of the Ontario Superior Court of Justice in Morison v Ergo-Industrial Seating Systems Inc., 2016 ONSC 6725 demonstrates, employers would be prudent to exercise extreme caution before alleging cause and withholding statutory entitlements. In that case, $50,000 in punitive damages was awarded against the employer for asserting cause for termination when there was no reasonable basis for such an assertion, and the defendant delayed in providing the plaintiff his record of employment, and significantly delayed in paying amounts owing under the Employment Standards Act, 2000.

The term “construction employee” has a defined meaning within the regulation. Employers believing that they employ a “construction employee” would be prudent to first obtain a legal opinion on the subject.

Implications of Right of Recall

In some cases, employees will be laid off from employment, and retain the right of recall. In those cases, special provisions apply to the provision of termination pay and severance pay.

Pursuant to subsection 67(3) of the ESA, an employee may elect to be paid his or her severance pay forthwith or to retain the right to be recalled. However, pursuant to subsection 67(5), an employee who elects to be paid shall be deemed to have abandoned the right to be recalled.

If the employee is not represented by a trade union and either elects to retain the right to be recalled or fails to make an election, the employer is required to pay the termination pay and severance pay to which the employee is entitled to the Director of Employment Standards in trust [ESA, s 67(6).] Different rules apply in respect of employees represented by a trade union [ESA, s. 67(7).]

If the employee accepts employment made available under the right of recall, the amount held in trust shall be paid out of trust to the employer and the employee shall be deemed to have abandoned the right to termination pay and severance pay paid into trust [ESA, s. 67(8).]

If the employee renounces the right to be recalled or the right expires, the amount held in trust shall be paid to the employee and, if the right to be recalled had not expired, the employee shall be deemed to have abandoned the right [ESA, s. 67(9).]

Personal Liability of Directors for Severance Pay

Any contemplation of the payment of severance pay should include consideration of the party ultimately responsible for the payment of such monies.

Subsection 131 of the Ontario Business Corporations Act, provides that:

The directors of a corporation are jointly and severally liable to the employees of the corporation for all debts not exceeding six months’ wages that become payable while they are directors for services performed for the corporation and for the vacation pay accrued while they are directors for not more than twelve months under the Employment Standards Act, and the regulations thereunder, or under any collective agreement made by the corporation.

A similar provision is contained within the Canada Business Corporations Act.

Whether “severance pay” can be properly characterized as a “debt … for services performed for the corporation” has been the source of debate and division.

For example, in the case of Northland Superior Supply Company Ltd v Sheet Metal Workers International Association, Local 397, 2005 CanLII 78286 (ON LA) the arbitration panel found the directors of the employer jointly and severally, or solidarily, liable to the employees of the corporation for severance pay. In making such an award, Arbitrator Daniel Harris wrote the following:

The characterization of severance pay as debts for services to the employer was dealt with by arbitrator Weiler in Western-National Drug Services and R.W.D.S.U, Local 580 (1978), 20 L.A.C. (2d) 202, at pages 207 and 208. He correctly concludes that severance pay is a benefit earned by the employee for his or her service to his or her employer. Differently put, it is a “debt . . . for services performed for the corporation” as described in s. 119 of the C.B.C.A

However, in the case of Englefield v. Wolf, 2005 CanLII 42483 (ON SC) which was released in the same year, Justice Maurice Charles Cullity of the Ontario Superior Court of Justice held that severance pay was not a “debt for services to the employer”. In making such a decision, Justice Cullity relied upon the 1988 decision of the Court of Appeal for Ontario in Mills-Hughes v. Raynor, (1988), 1988 CanLII 4660 (ON CA), 47 D.L.R. (4th) 381 (ON CA) in which Blair J.A. stated:

[13] Since it is specifically provided that severance payments “are not compensation for past services”, they cannot qualify as “debts ... for services performed for the corporation” under s. 114(1) of the Act.

That debate may be finally resolved by subsection 81(3) of the ESA, which provides that the wages for which directors of a corporation are liable do not include termination pay and severance pay as they are provided for under the ESA. In the 2010 case of Travel Sensations Mississauga Inc. v. Frankova-Ahlami, 2010 CanLII 72071 (ON LRB) the Ontario Labour Relations Board held that neither the Employment Standards Officer nor the Board has the power to order a director in his capacity as a director of the employer to pay termination pay to a dismissed employee.

Contact Me

To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.

Sean P. Bawden is a partner with Kelly Santini LLP, located in Ottawa, Ontario, Canada. He practices in the areas of employment law and civil litigation. He has also taught Trial Advocacy for Paralegals and Small Claims Court Practice at Algonquin College in Ottawa.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

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