Does your payroll exceed $2.5 million?

This should not be a trick question and yet it can make a real difference

Does your payroll exceed $2.5 million?
Stuart Rudner

by Brittany Taylor and Stuart Rudner

We have spent a lot of time discussing how employers can reduce their obligations at the time of termination. In some cases, employers want to reduce them all the way down to the “statutory minimum” — but what happens when it is not entirely clear what that means?

The default at law is that employees are entitled to “reasonable notice” of dismissal pursuant to the common law. While there are no hard and fast rules — and, contrary to popular belief, it is not one month per year of service — that does give you a sense of the magnitude.

So a 20-year employee could be entitled to a-year-and-half, or more, of severance. By contrast, Ontario’s Employment Standards Act, 2000 (ESA), would only provide that same employee with eight weeks of notice or termination pay.

In addition to notice or termination pay, the ESA establishes a free-standing right to “severance pay,” which provides an employee with an additional week of pay for each completed year of service, up to a maximum of 26 weeks. To qualify for severance pay, however, an employee must have five years of service and the employer must have a payroll of at least $2.5 million.

At first blush, that seems pretty straightforward. But what about employers that have operations across the country or around the world? Since the ESA only regulates employment in Ontario, does it only count payroll in Ontario?

Unfortunately, the answer to this question is not so straightforward. Past cases have flip-flopped on this issue, with early decisions of the Ontario Superior Court finding that an employer’s payroll for purposes of the ESA was to be measured within Ontario only, regardless of its total overall payroll.

The pendulum swung back the other way in 2014, with the decision in Paquette c Quadraspec Inc. In this case, Alain Paquette brought a motion seeking to establish that the termination clause in his employment agreement with Quadraspec was unenforceable since it did not comply with the minimum requirements of the ESA. The clause purported to provide Quadraspec  with the ability to terminate Paquette’s employment at any time by providing him with notice, or pay in lieu of notice, equal to two weeks’ for every completed year of service, up to a maximum of six months, with no provision for the continuation of his benefits.

The court agreed with Paquette that the clause was unenforceable, and also went on to determine he was entitled to severance pay since the company’s total payroll (not just Ontario) exceeded $2.5 million. The court pointed out, among other things, that the legislature, if so desired, could have made it expressly clear that only an employer’s payroll within Ontario was to be counted for purposes of determining whether the $2.5 million threshold had been reached. As it had not done so, the court found “no reason to interpret these provisions to narrow their scope by adding the words “in Ontario.”

The decision in Paquette appeared to settle this issue for some time, until the Ontario Labour Relations Board released its decision in Hawkes v Max Aicher (North America) Ltd. at the end of 2018. This decision arose as a result of an application for review filed by Doug Hawkes, from a decision of an employment standards officer (ESO) who found that he was not entitled to severance pay. The basis for the ESO’s decision was that only those salaries paid by the employer under Ontario jurisdiction were to be considered in calculating the payroll threshold, regardless of the fact that the employer’s global payroll was well in excess of $2.5 million.

In agreeing with the employer, the OLRB noted that prior to Paquette, the board and the courts had both previously interpreted section 64 of the ESA (which establishes the entitlement to severance pay), with regard to the limits set out in section 3(1). Section 3(1) provides the overall “framework” in which the ESA applies — namely, to “an employee and his or her employer” where the work is performed in Ontario (or if the work is performed outside Ontario, where it is a continuation of work performed in Ontario).

The OLRB found that the court in Paquette had failed to address the interaction of section 3(1) and section 64 of the ESA when reaching its decision. In other words, it had reviewed section 64 in isolation, failing to consider the overall framework and jurisdiction of the ESA itself.

Furthermore, the factual circumstances in Paquette were found to be distinguishable. While in that case there was one employer with employees in both Ontario and Quebec, in Hawkes the employee was ultimately asking the board to consider the payroll of “two” employers (one of which did not have any employees in Ontario), on the basis that they were related employers for purposes of the ESA.

Ultimately, the OLRB found that it simply did not “make sense to presume that provincial legislation could affect employment or operations anywhere but in Ontario.” As a result, the OLRB concluded that only the employer’s payroll within Ontario should be counted in terms of determining Hawkes’ entitlement to severance pay.

Key takeaways
The decision in Hawkes suggests a shift in the state of the law with respect to the interpretation of section 64 of the ESA, which could have the effect of alleviating certain employers with larger operations outside of Ontario from the obligation to provide a dismissed employee with severance pay.

However, both employers and employees should keep in mind that the OLRB is a specialized tribunal that operates separately from the civil court system. As a result, this issue can unfortunately not be considered “settled,” and employers should be cautious, and seek legal advice, when assessing whether or not they have met the $2.5 million threshold.

Brittany A. Taylor is a senior associate at Rudner Law in Toronto.

Latest stories