$2.5 million payroll rule – is that only Ontario employees or total global payroll?
By Stuart Rudner
Is your payroll more than $2.5 million? For some employers, the answer may have just changed due to a court ruling — and as a result, their liability for severance pay may have increased dramatically.
Employers in Ontario are required, at a minimum, to provide notice of dismissal in accordance with the Employment Standards Act, 2000 (ESA). This notice can be provided as working notice, pay in lieu thereof or a combination of the two. In addition, the ESA requires that employers provide severance pay to employees in certain circumstances. Most commonly, this obligation will be triggered when the employee has accumulated at least five years of service (note that this does not have to be uninterrupted service) and the employer's payroll is $2.5 million or greater.
The ESA is silent with respect to the breadth of the workforce that is to be included in assessing an employer's payroll. As a result, many people have been confused as to whether only employees in Ontario should be counted, or whether it extends across Canada, or whether employees within the company in locations outside of Canada should also be included. Historically, the judicial interpretation has been that only employees within Ontario are to be counted. That was confirmed as recently as 2011. As a result, even if an employer's total payroll is in the tens of millions, if it is less than $2.5 million in Ontario then the obligation to provide severance pay would not be triggered.
A recent decision of the Superior Court of Justice of Ontario appears to have taken the opposite approach and, in so doing, dramatically impacted the rights and obligations of employers and employees at the time of dismissal. In the case of Paquette c. Quadraspec Inc., the court was faced with this fundamental issue. Despite the existing jurisprudence holding that only payroll in Ontario is to be considered, Justice Kane held that for purposes of severance pay obligations pursuant to the ESA, an employer's total payroll is to be included. As a result, although the employer's payroll in Ontario was clearly less than $2.5 million, they were ordered to provide Paquette with severance pay due to the fact their global payroll greatly exceeded that amount.
Unless overturned, this decision could have tremendous implications for multijurisdictional employers that operate in Ontario. By way of example, an American corporation with a single sales representative in Ontario could be liable for severance pay if they dismiss that employee. The ESA provides that, if the criteria discussed above are met, the employee is entitled to one week of severance for every year of service, prorated for partial years of service and capped at a total of 26 weeks. As a result, the cost to employers could be tremendous.
For employees, this is a good example of why it is important to consult with an employment lawyer if you are dismissed. Those of us that keep up-to-date on the law will be aware of this change, and will help you to ensure that you receive all the compensation that you are entitled to at the time of dismissal. Since notice of termination is capped at eight weeks by the ESA, the entitlement to severance pay could dramatically increase an employee’s payout at the time of dismissal, especially if they have a contract which limits them to their statutory entitlements.
For employers, a failure to provide severance pay if your total payroll exceeds $2.5 million could now be found to be a breach of the ESA, which can expose you to significant liability. As the law is constantly changing, it is always advisable to consult with an employment lawyer before dismissing an employee.