Top 10 Issues for Employers, #7: Obligations When Terminating Without Cause

This is the seventh instalment in our Top 10 Issues for Employers series. This issue addresses termination entitlements upon a “without cause” dismissal.

OVERVIEW

Understanding an employee’s entitlements upon a without cause dismissal is an essential step towards avoiding unnecessary wrongful dismissal claims. Canadian law imposes obligations on employers to provide their employees with certain entitlements in the event of a without cause dismissal. Since there is a very high bar for establishing “just cause” — which generally permits an employer to provide no notice or other entitlements upon dismissal — the vast majority of terminations in Canada will be without cause.

REASONABLE NOTICE OF TERMINATION

In the absence of an enforceable termination clause in a written employment contract, an employee’s termination entitlements will be governed by Canadian common law (with the exception of Quebec, discussed below). One obligation imposed upon employers by the common law is to provide employees with reasonable notice of termination of employment, or pay in lieu of reasonable notice, in the absence of just cause for dismissal.

There is no fixed formula for determining reasonable notice in any given case. There are, however, several factors that courts consider when determining reasonable notice, including the availability of similar employment as well as the employee’s age, length of service, position and level of compensation. In essence, the courts aim to identify, on a case-by-case basis, the length of notice that the employee will need to find alternate work of a similar nature. By way of example, reasonable notice generally ranges from a few weeks up to 24 months depending on the above factors, but there are exceptions.

The concept of reasonable notice signifies actual or written notice. In principle, the employee is expected to continue his or her active employment during the applicable notice period. As an active employee, the individual would usually be entitled to all elements of his or her compensation package during the notice period. However, employers typically provide an employee with pay in lieu of notice or a “package” upon termination of employment rather than actual or working notice. Thus, in the pay in lieu of notice scenario, to mirror what they would have received had they been provided with actual notice, employees are generally entitled to payment reflecting all elements of their compensation package, including, for example, salary, benefits and pro-rated bonus or other incentive compensation (subject to the terms of any applicable policies or plans).

Written employment agreements may modify and/or limit an employer’s common law obligations. In general terms, where there is a proper and enforceable employment contract that specifies what the employee will receive upon termination of employment, then it will be the employment contract — and not the common law — that the employer will rely on in determining an employee’s entitlements upon termination. However, any contract that a court finds as providing less than the employee’s minimum statutory entitlements will be viewed as unenforceable and an employee in such a scenario will be entitled to reasonable notice of termination.

QUEBEC CONSIDERATIONS

Common law principles are not applicable in Quebec. Rather, employers’ obligations are established by the Civil Code of Québec, which provides that an employee can claim reasonable notice (or compensation in lieu of notice) of the termination of his or her employment, such that an employee’s entitlements upon a without cause dismissal in Quebec are substantially similar to those of employees in the common law provinces and territories.

That being said, Canadian employers should be aware of the fact that there are unique legislative and other requirements relating to employment in Quebec that are not present in the common law provinces and territories.

STATUTORY MINIMUM STANDARDS

Employment standards legislation in all Canadian jurisdictions sets out minimum notice (or pay in lieu of notice) obligations for employers when they dismiss an employee without cause. It should be emphasized that the statutory minimums prescribed by employment standards legislation with respect to notice and severance are just that — minimum standards. They represent the lowest possible amounts that an employee is entitled to receive on dismissal without cause. An employer cannot contract out of the statutory minimum entitlements.

Generally, an employee’s entitlement to statutory minimum notice of dismissal increases with his or her length of service. For example, in Ontario, employees are generally entitled under statute to one week’s notice (or pay in lieu of notice) for each completed year of employment, to a maximum of eight weeks. Although employees’ entitlement to notice of termination of employment varies slightly from province to province, employment standards legislation across the Canadian jurisdictions currently provide for a maximum statutory notice requirement of eight weeks or less.

Further, many employment standards statutes include enhanced notice requirements for employers that effect a mass termination of employment, which is defined in most provinces and territories as the dismissal of 50 or more employees in a span of four weeks or less (although in several provinces the threshold is as low as 10 employees).

In Ontario and the federal jurisdiction, employment standards legislation also requires employers to provide employees with statutory severance payments (in addition to statutory notice or pay in lieu of notice) in certain circumstances. In Ontario, employees who have five or more years of service at the time of their dismissal are entitled to statutory severance pay, if their employer has a payroll of C$2.5-million or more, or if the dismissal is part of a discontinuance of a business involving the termination of 50 or more employees in a period of six months or less. Severance pay is equal to one week’s pay for each completed year of employment and a proportionate amount of one week’s pay for a partial year of employment, to a maximum of 26 weeks’ pay. In the federal jurisdiction, an employee is entitled to statutory severance pay if he or she has completed 12 consecutive months of employment with an employer before being dismissed. Statutory severance pay in the federal jurisdiction is calculated as the greater of two days’ wages for each year of employment completed by the employee and five days’ wages.

BONUS AND OTHER INCENTIVE AWARDS

Even after the appropriate length of notice has been determined, there are often still disputes over whether compensation for lost bonus or other incentive awards should be included. As mentioned above, when employees are provided with pay in lieu of notice, they are normally entitled to all elements of compensation that they would have received had they remained employed during the notice period, which may include bonus and other incentive awards. However, the terms of any underlying bonus or incentive plans or policies are relevant to the determination of whether compensation for such awards should be included as part of an employee’s termination entitlements. For this reason, employers should ensure they have well-drafted plan documents.

CONCLUSION

Determining an employee’s entitlements upon a without cause dismissal may not always be straightforward. It requires considering whether common law reasonable notice applies or whether a contractual provision (including those which may limit an employee to the statutory minimums) governs an employee’s termination entitlements. If common law reasonable notice applies, the notice period must take into account various factors, including the availability of similar employment as well as the employee’s age, length of service, position and level of compensation. On the other hand, a contractual termination provision must be checked to ensure it is enforceable and that it complies with applicable statutory minimum standards. Finally, it must be determined which elements of compensation will be owed during the notice period, including bonus or other incentive awards.

Investing in well-drafted employment contracts and plan documents at the outset, and ensuring they are regularly reviewed and updated, is a good way to avoid potential pitfalls and bring additional certainty and consistency to the termination process.

If you require further information or assistance with your employment contracts and plan documents, please contact any member of our Employment & Labour group.

Click here for all issues in the Top 10 Issues for Employers series

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