April 1, 2015

Severance and notice in the employment context

Glossary of legalese, Part 3


As discussed in a previous columns, there are many legal or contractual concepts, terms or conditions used in tender packages, contracts, insurance policies, legislation and litigation which can be confusing or incomprehensible. Accordingly, the third instalment of our glossary of construction law and contract legalese!

Severance pay
Where an employee/employer relationship is terminated, for whatever reason, we often hear people talk about “severance pay,” from both sides of that table. In by far the vast majority of circumstances, however, severance pay has no role whatsoever upon the termination of an employee/employer relationship. This is because a terminated employee will only be entitled to severance pay in limited circumstances which depend on the size and number of employees involved.

The first thing to understand is that severance pay is a creature of statute. Unless a statute requires that it be paid, it need not be paid. In Ontario, for example, the Employment Standards Act, S.O. 2000, c.41, provides that severance pay shall be paid to the employee if he or she was employed for five years or more and the severance occurred because of a permanent discontinuance of all or part of the employer’s business where 50 or more employees are terminated within a six-month period, or where the employer has a payroll of $2.5 million or more. In Ontario, few employers and terminations meet this test. Again, unless the statutory test is met, we don’t worry about the concept of severance pay.

“Notice” of termination in the employment context
On the other hand, an employee’s right to be compensated upon termination, in some circumstances, is not a creature of statute. Rather, at least in Canada’s “common law” jurisdictions outside of Quebec, the principle that an employee is entitled to be paid money in lieu of notice upon termination goes back to old Kings in England. In Quebec, these same “common law” concepts have been entrenched in the Quebec Civil Code going back to its original forms.

The principle recognizes that, in certain circumstances, an employer will be entitled to terminate an employee, without cause. In that circumstance, the question becomes: How much notice of the termination is the employee entitled to, to look for other employment and get his or her affairs in order? Without an agreement to the contrary, courts and common law jurisdictions have suggested that employees are entitled to as much as one month of notice for every year they have served, perhaps up to as much as 16-20 months, depending on the seniority and job description of the employee.

The starting point, however, is to understand that the employer who wants to terminate the employee can give actual notice of that intention, and avoid the need to pay money in lieu of that notice. The employer can thus go to the employee and say, “I am going to give you sufficient and adequate notice of the termination.” If the appropriate notice period is 12 months, the employer can say, “Your job will be terminated 12 months from today.” In that circumstance, and so long as the notice period was properly assessed, the employee would not be entitled to any payment in lieu of notice.

Many employers don’t want to give actual, working notice that the termination is coming. They don’t want to expose the business’s assets, etc., to the employee during the notice period, don’t believe the employee would be productive with termination hanging over his or her head, or don’t believe the employee’s continued attendance in the workplace would be good for morale. In those circumstances the employer might decide to give the employee “notice pay,” in lieu of actual notice. In that circumstance, the employer would say, “I am going to terminate you today. I calculate that the appropriate notice period would be 12 months. Accordingly, I am going to give you 12 months’ pay (inclusive benefits), in lieu of that notice.”

Legislation will also often provide minimum notice periods. The Ontario Employment Standards Act, for example, generally requires that one week’s notice be provided for every year, or partial year, of service – up to eight weeks. In addition, the legislation sets out circumstances (many of which are relevant in the construction industry) where no notice would be required.

The common law generally allows the employer and employees to agree on what notice will be appropriate. The legislation, after all, only sets out minimum requirements. It is for this reason the many employers will ensure that their contracts with their employees adopt the notice provisions established by the legislation, and set out that no additional further notice, or payment in lieu of notice, will be provided. Where such clauses do not exist (or are not enforceable), the employee may pursue his or her rights to “common-law notice,” which (as above) might amount to much more than they are entitled to under the applicable legislation.

Notably, there has to be consideration for any contractual provisions to be enforced. Accordingly, when an employer goes to current employees and asks them to sign a new or updated contract, which limits or restricts the rights to common-law notice, the clauses will often be not enforceable. This is because the employer has not given the employee anything in exchange for this contractual change. In such circumstances, it is often recommended that the employer give appropriate consideration (i.e. money or other valuable compensation), in exchange for accepting the new contractual terms.

Robert Kennaley has a background in construction and now practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law issues and can be reached at 416-368-2522 (Toronto) or 519-426-2577 or at kennaley@mclauchlin.ca.This material is for information purposes and is not intended to provide legal advice in relation to any particular fact. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.