In my latest First Reference Talks blog post, I discuss common “termination traps” that employers routinely fall into, unwittingly exposing themselves to liability. Not surprisingly, many employees make the same mistakes when assessing their rights, and end up not getting what they are entitled to.
1) Improperly calculating termination pay
Many employers use employment agreements in order to limit their obligation to provide termination pay at the time of dismissal. In some cases, the termination clause in the contract will provide that the employee is entitled to the statutory minimum amount only, and nothing more. Most employers assume that this requires payment of base salary only. However, most legislation, including the Employment Standards Act, 2000, contain specific definitions and formulas that must be taken into account. In Ontario, employers must provide a specific number of weeks of termination pay, depending upon the employee’s length of service.
Where employers often get into trouble is when dismissing an employee that either did not have a regular workweek, or was paid on a basis other than purely salary or hourly wage. For example, employees that are paid in whole or in part by commission, or receive bonuses or other payments. In those cases, the employer must determine an average amount of weekly pay. Reviewing the previous 12 weeks in order to calculate all of the amounts that this employee received. This includes not only base salary, but also commissions, bonuses, and other payments. The total amount is then to be divided by 12 in order to determine a weekly amount, which is then used to calculate the amount of termination pay. In some cases, such as where the employee received a significant bonus in the months before termination, their entitlement to termination pay can be substantially more than the employer anticipates, and an employee that does not obtain proper advice can end up accepting termination pay that is far below their legal entitlement.
2) Severance pay
In Ontario, the Employment Standards Act, 2000 requires notice of dismissal, or termination pay, and also requires that the employer provide severance pay in specific circumstances. This amount, which must be paid as a lump sum and not as working notice or salary continuance, is payable if the employee was employed by the employer for five years or more and,
(a) the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or
(b) the employer has a payroll of $2.5 million or more. 2000, c. 41, s. 64 (1)
How do you determine if you meet the $2.5M payroll threshold?
Historically, since this requirement was set out in Ontario legislation, it was interpreted to refer to payroll in Ontario. However, a recent court decision interpreted it otherwise, determining that the employer’s entire payroll should be taken into account. This can have dramatic consequences for employers that are national, or international. While in the past, they may have been shielded from the requirement to pay severance pay due to the fact that their payroll in Ontario was below $2.5 million, it appears that going forward, they will be obligated to pay severance pay to employees in Ontario even though the bulk of their operations may be elsewhere.
Not taking all periods of employment into account
The Employment Standards Act, 2000 is clear, in section 65 (2), in providing that all periods of employment, even if the employment was not continuous, are to be taken into account when determining whether the employee is eligible for severance pay. Many employers fail to appreciate this, particularly where the employee may have worked for a predecessor company.
3) Not providing benefits
When an employer chooses to provide pay in lieu of notice, most employment standards legislation requires that all pay and employment related benefits continue during the statutory notice period. Failure to do so will result in a finding that the employee has breached the legislation. Furthermore, as some recent decisions in Ontario have confirmed, even a failure to reference the fact that benefits will continue in the employment agreement will render that clause unenforceable. That is true even if the employer had every intention of continuing benefits. As a result, the employer that takes the time to draft a termination clause limiting their obligations to the statutory amounts termination pay only may find themselves governed by the common-law anyway, as their clause will be found to be unenforceable if it is not drafted properly.
4) Failure to continue disability coverage
Further to the paragraph above, if the employee is entitled to notice beyond the statutory period then, by default, all benefits are to continue. Unfortunately, most insurers will not continue disability coverage when the employee is no longer actively working. Most legislation addresses this by deeming the statutory notice period to be a period of active employment. However, unless there is a contractual term or policy that provides otherwise, disability coverage must also continue during the common law notice period. As we have seen in recent court decisions, failure to do so can result in a tremendous liability for the employer, who will effectively take the place of the insurer and have to pay disability benefits if the employee becomes disabled during the notice period.
5) Failing to pay statutorily required amounts
Many employers will offer a severance package to a dismissed employee, in exchange for the execution of a Full and Final Release. However, what they fail to appreciate is that the statutory amounts must be paid, regardless of whether the employee signs the release or not. As a result, the best practice is to confirm, in writing, that the statutorily required amounts will be paid, but that anything above and beyond that will only be paid in exchange for a release. Failure to do so will result in a breach of the applicable legislation.
6) Lying about the reason for dismissal
Unless the dismissal is for cause, employers do not have to provide a reason. Unfortunately, many employers get themselves into trouble by trying to spare the employee’s feelings and indicating that the position has been eliminated. This is the workplace equivalent of “it’s not you, it’s me”. There is nothing wrong with saying this if it is true. However, if the employer then posts the position, the employee can seek additional damages on the basis that the employer breached its duty of good faith in the course of dismissal by lying to the dismissed employee.
7) Requiring a release without providing consideration<
Many employers have learned that it is wise to obtain a Full and Final Release from a dismissed employee in order to prevent future claims. However, they fail to understand that in order to have a legally binding Release, the employer must provide some form of consideration to the employee. Unfortunately, in many cases the employer is only offering the statutorily required payments, which the employee is entitled to regardless of whether or not they sign the release. In other cases, the employer is providing termination pay pursuant to a termination clause. If that clause is binding, then the employee is entitled to the amount of termination pay provided therein whether or not they sign the release. In order to obtain a legally effective release, the employer must offer something beyond what the employee is already entitled to.
8) Failure to provide bonuses, commissions or other variable pay
By default, an employee that receives pay in lieu of notice of dismissal is entitled to receive all of the compensation that they would have received had they continued to work during the notice period. This includes not only base salary, but also commissions, bonuses, benefits, and perquisites such as car allowance. It is open to the employer to address this through effective terms in a contract, or policies that provide otherwise. However, in the absence of such contractual terms or policies, employers must provide all forms of compensation during the statutory and common law notice periods.
9) Underestimating the entitlement of short-term employees
Unless there is a contractual termination clause that is enforceable, the common law requires that “reasonable notice” of dismissal be provided. This is based upon many factors, including the primary factors of length of service, age, and position/character of employment. Many employers and employees mistakenly assume that a relatively short-term employee will have a minimal entitlement. However, this is not necessarily the case, particularly for senior level employees or employees that were induced away from previous employment. In some cases, a recent decision of the Ontario Superior Court of Justice in Rodgers v. CEVA Freight Canada Corp., short-term can employees received surprisingly lengthy notice periods. In that case, Mr. Rodgers was lured away from a previous job and required to make a substantial investment in the company. Despite the fact that he was only employed for three years, he was awarded 14 months of pay in lieu of notice.
These are just a few examples of how employers can unwittingly fall into traps at the time of termination and expose themselves to significant liability. Employees often fail to understand their rights and deprive themselves of compensation and benefits that they are legally entitled to. At the risk of sounding self-serving, it is wise for any employer contemplating the dismissal of an employee to consult an Employment Lawyer, and also for a dismissed employee to do the same.
We routinely work with employers to plan and execute dismissals in order to ensure that they are done properly and fairly. And we work with employees to assess severance packages and ensure that they are getting all they are entitled to.