July 21, 2021

Stretching the Borders on Severance Pay

A key requirement under the Employment Standards Act, 2000 (“ESA”) is that employers with a payroll over $2.5M must provide “severance pay” to any employee with 5 or more years of service. Severance pay is equivalent to 1 week per year of service, to a maximum of 26 weeks.  This is in addition to notice of termination, or termination pay, which varies between 1 week and 8 weeks’ compensation. 

One issue that has confounded employers is the geographic scope of the $2.5M payroll requirement.  Does the ESA require employers to count only Ontario payroll, or is it national or even global payroll?

Logically, since the ESA is Ontario-based legislation, it made sense to assume that the legislature intended to restrict the payroll threshold to Ontario.

That assumption was questioned in 2014 with the decision in Paquette c. Quadraspec Inc. The judge noted that the severance threshold must take into account not just payroll within Ontario, but across Canada. This created considerable confusion for employers who may have had small operations within Ontario, but a larger payroll throughout the country.

In 2018, the Ontario Labour Relations Board determined, in Hawkes v. Max Aicher (North America) Limited, that only Ontario payroll was relevant to determining the severance threshold. It essentially disregarded the Paquette decision.  Employers have been relying on that decision, until now.

The Board’s decision in Hawkes was judicially reviewed before the Divisional Court.  The Court found that the Board’s decision in Hawkes was unreasonable.  According to the Court, an employer’s global payroll is relevant to determining whether or not an employer is obligated to pay severance.  If Ontario payroll does not exceed $2.5M, but the employer’s global payroll does, severance pay is payable.

The Upshot

The Hawkes decision may not be the last word on the calculation of severance pay as the Ontario Court of Appeal may weigh into the issue.

For now, employers with small operations in Ontario, but larger operations nationally, or even globally, will need to open up their pocketbooks wider than they have needed to before. If national or global payroll exceeds $2.5M, employees with more than 5 years of service will be entitled, in addition to ESA termination pay, to severance pay of 1 week per year of service, to a maximum of 26 weeks. 

Critically, the ESA requirements are only minimum legal requirements. In the absence of a contract of employment limiting the employer’s obligations to the minimum standards, an employer will have to provide reasonable notice of termination, which can be 4 weeks per year of service, or higher in certain circumstances. 

Calculating termination and severance can be complicated, and there is an art to designing an exit package that helps employers avoid legal strife. Contact our office today to learn more about how we can assist.