What is meant by a $2.5-million payroll?

Ontario court further clarifies severance obligations of employers

What is meant by a $2.5-million payroll?

A recent court decision might not go over with many employers, even though the ruling is not entirely unexpected.

In looking at whether a company operating in Ontario owed an employee severance, the Ontario Superior Court of Justice Divisional Court ruled that the global payroll should be considered, not just the provincial one — raising the stakes for employers.

While logically there’s nothing wrong with the decision, it’s unfortunate from a business perspective, says Jeremy Schwartz, partner at Stringer, management lawyers in Toronto.

“If you have less than a $2.5-million payroll, then you’re a relatively smaller company. And so the government wants to encourage you and not oblige you to pay a substantial amount of severance pay under the [Employment Standards Act]… Now, if you are an international business and you’re thinking of transplanting a little satellite office here with one or two employees, all of a sudden, that business venture can become less profitable because you have to accrue for this additional liability.”

Background

Doug Hawkes worked for Max Aicher (North America), a subsidiary of Max Aicher GmbH & Co KG, a steel company headquartered in Bavaria, Germany. From 1977 to 2010, he worked for US Steel and its predecessor, Stelco, as maintenance manager. In 2010, Aicher purchased the assets of US Steel, so Hawkes worked at Aicher until his employment was terminated in 2015.

Hawkes filed a complaint with the Ministry of Labour alleging that he was entitled to termination, vacation and severance pay. But in 2017, an employment standards officer determined that Hawkes was not entitled to that pay because Aicher did not have a payroll of $2.5 million or more and only salaries under Ontario jurisdiction factor into the calculation of the payroll threshold.

Ontario’s employment standards require an employer to pay severance pay if the employee worked for the employer for five years or more and the employer has a payroll of $2.5 million or more.

Hawkes applied to have this decision reviewed by the Ontario Labour Relations Board, which also determined that although Aicher’s global payroll far exceeded $2.5 million, it was not obliged to pay severance pay because its payroll in Ontario was less than $2.5 million.

Hawkes then sought a judicial review of this decision. He submitted that the company’s global payroll far exceeded the $2.5 million threshold, even if Aicher’s Ontario payroll did not, and both should be considered under the ESA, relying on the decision of the Superior Court of Justice in the 2014 Paquette v. Quadraspec Inc., which held that an employer’s national payroll must be considered.

Ultimately, the divisional court agreed, calling the board’s considerations “illogical” and its analysis “flawed.”

“Are we going to get to the point where we start piercing veils and start chasing payrolls in other countries?”   

“The board in this case saw ambiguity in the language of the act where there is none; purported to distinguish Paquette; and favoured an interpretation of the ESA that accomplishes the opposite of what the Supreme Court directed. Instead of extending the protections of the ESA to as many employees as possible while remaining true to the words of the act, the board favoured an interpretation that directly undermines that purpose. Rather than narrowly interpreting the payroll exemption and limiting it to truly small enterprises, the board interpreted it broadly, allowing some large national or multinational corporations to avoid paying severance pay to long-service employees.”

Takeaways for employers

Until this decision, many people didn’t follow the Paquette decision, even though it was “carefully reasoned and detailed,” says Michael Comartin, partner in the Toronto office of Ogletree Deakins.

“There’s nothing in the legislation that really tells you whether that meant Ontario payroll, or national, or international or anything else. It just says all the employers’ employees, and there’s even a calculation section that doesn’t tell you anything about that.”

But large multinational employers that may have five people in Ontario, for example, and thousands of employees in Europe should take note, he says.

“That’s the type of company that needs to be concerned by this decision or needs to consider this decision carefully, because they may now be subject to severance pay by virtue of their employees in provinces or other countries. That’s really the group that’s impacted by this,” says Comartin. “Are we going to get to the point where we start piercing veils and start chasing payrolls in other countries?”

The other challenge is if an employee takes the position that you’re a severance pay employer because you have entities outside Ontario and payroll would be over $2.5 million if those were combined, says Schwartz.

“So, when you’re terminating an employee, if your view is that the two different entities are sufficiently different, and don’t really work in tandem with each other... you might not pay that out,” he says.

“[But] if you choose to wait for a judge to tell you if you’re right or wrong, there’s a possibility that the judge could award punitive damages because you withheld employment standards entitlements up to the date of trial. So, it’s a risky play for an employer. And I think some employers might end up erring on the side of paying it out, even if they have a legitimate defence that the two entities are not one and shouldn’t be treated as one.”

The good news for employers is that this recent decision shouldn’t invalidate a well-drafted termination provision, says Comartin.

“The best course of action, even before Hawkes, would have been when drafting a termination provision to include all of the potential rights under the Employment Standards Act… mentioning severance pay.”   

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