Severance Pay and the Issue of Payroll

Hi, Stuart here with another Rudner Law Employment Law update, and today I want to talk about severance pay.

In Ontario, when we talk about severance pay, we mean something very specific, not just severance generally speaking, but our Employment Standards Act, 2000, refers to both notice of dismissal, or termination pay, as well as severance pay. Viewers will probably already know that in order to be eligible for severance pay, there are certain conditions you have to meet. The most common scenario is that the employer must have a payroll of at least $2.5 million, and the employee must have been employed for at least 5 years. The question that often arises however is which payroll do you look at? Is it the payroll only in Ontario, is it the Canadian payroll, is it the international payroll, if you’re talking about a really large company, and for the last couple of years, many of the Employment Lawyers and HR Practitioners have proceeded on the basis that we’re talking about Canadian payroll. So in other words, you may have a small operation in Ontario, with a payroll of $500,000, but if you have a payroll of $3 million across the country, you will be required to pay severance pay. That’s been the assumption for the last couple of years.

Interestingly, that was revisited in a recent case, and I apologize if I mispronounce the name, the case is Kastriot Gremi v. International Distribution Network Canada. It’s a 2018 case of the Ontario Labour Relations Board and in that case, this was the only issue: was the payroll to be judged based upon Ontario only, or Canada wide? Not surprisingly, the employee wanted it to be Canada wide, because that would get them over $2.5 million and the employer said no, the Employment Standards Act, 2000, is Ontario legislation, relates to Ontario based employment, and should therefore only be based upon payroll in Ontario. And they succeeded. This case followed a number of previous decisions which held that because of the nature of the legislation, which is provincial, and the fact that it regulates provincially based employment, then the interpretation, even though the Employment Standards Act is generally supposed to be interpreted so as to protect the employee, in this case, the most reasonable interpretation is that the payroll we’re talking about is that in Ontario only. So, in that case, because in Ontario, the company’s payroll was under $2.5 million, they were not obligated to pay severance pay. That is good news for employers in Ontario, particularly those employers who have national or multinational operations, but a smaller operation in Ontario where the payroll is under $2.5 million. Of course we have seen the cases go both ways on this, so do not take this as the absolute final word.

One other point to remember, because it’s something that a lot of people don’t appreciate, I mentioned at the outset that the other criteria is that the employee must have been employed for at least 5 years – that is a cumulative 5 years. In other words, they could work for the company for 2 years, they could then resign on their own, not be dismissed, but actually leave of their own volition, go away for 15 years, work somewhere else, and that 2 years will still count, so if they work for another 3 years they will have 5 years total, and assuming the payroll exceeds $2.5 million, they will be entitled to severance pay if and when they are let go.

So that’s a brief update on the law of severance pay in Ontario, thanks for tuning in, and have a great day.

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