Employment Law

Reducing the Cost of Employee Terminations: Part 3

By September 18, 2019 No Comments

This is my third of four blogs on this topic.

My first blog discussed how to manage the costs and legal risks associated with employee terminations by including a well crafted legally enforceable termination clause in your employment contracts. The second blog  discussed  just cause terminations and how an employment contract can take away a judge’s power to determine whether just cause exists in certain situations.

This blog discusses without just cause terminations and how you can significantly decrease termination pay owing in this scenario.

Terminating an Employee with No Notice of Termination  is a Wrongful Dismissal

An employee who is terminated without cause and without notice of termination is wrongfully dismissed. Employers rarely provide any notice of termination. Instead the employer provides the employee with termination pay instead of working notice of termination. So most employee terminations are wrongful.

An employee is generally entitled to notice of termination if:  their position is eliminated as a result of a restructuring; they are laid off; they are terminated for poor performance except in exceptional circumstances.

Notice Requirement Under the Employment Standards Act (the “ESA”)

The ESA sets out the minimum notice of termination that an employer is required to provide an employee. The minimum notice requirements are as follows:

  • 0 to 3 months service: no notice;
  • 3 months to one year service :  1 week notice;
  • 1 to 3 years service : 2 weeks notice;
  • then one week for each additional year of service to a maximum of 8 weeks notice for employees with more than 8 years service.

There are nine (9) situations when an employer is not required to provide an employee with notice of termination under the ESA. The most common exemption is for an employee “who has been guilty of wilful misconduct, disobedience or willful neglect of duty that is not trivial and has not been condoned by the employer.” An employer should always check to see whether one of these exemptions apply in without cause terminations.

An employee with five years’ service who works for an employer with an annual payroll of over $ 2.5M is also entitled to one week of severance pay for each year of service to a maximum of 26 weeks’ severance pay. 

Notice Requirement at Common Law

If the employer and the employee do not agree on how much notice of termination an employee is entitled to receive (i.e. in an employment contract) then the employee is generally entitled to “reasonable” notice of termination which is almost always more than the minimum notice requirements set out in the ESA.

The courts look at a number of factors when deciding what is reasonable notice for a particular employee. The courts always consider the employee’s age, position, length of service and the availability of comparable employment given the person’s education and experience. Other factors are sometimes considered. For example, for short-service employees a judge will consider whether or not the employee was lured from secure employment.

It is not uncommon for a judge to conclude that an employee is entitled to at least one month notice for each year of service. It is more of an art than a science to predict what notice period a judge will award in each wrongful dismissal case but an employment lawyer can give you a ballpark estimate. The fact is two judges hearing the same case could decide on different notice periods for the same employee so there is always litigation risk when trying to assess an employer’s legal exposure.

The Ontario Court of Appeal recently stated that 24 months is the maximum reasonable notice period except in “exceptional circumstances” but trial judges seem to be interpreting this term more broadly in recent years – particularly for long service employees in their 60s.

Contracting out of the Common Law: Termination Clauses

An employer can take away an employee’s right to receive reasonable notice of termination by including a termination clause in the employee’s employment contract as long as the clause provides the employee with at least the ESA minimum notice period.

Accordingly, an employer with a payroll of less than $ 2.5M can reduce their termination obligations from 24 months to 8 weeks for each employee by including a properly drafted termination clause in each employee’s employment contract.

Employee-side lawyers often claim that the termination clause in their client’s employment contract is not legally enforceable. If the lawyer can convince a judge that the termination clause is not enforceable then the employee is generally entitled to receive pay in lieu of reasonable notice of termination. Trial judges have refused to enforce termination clauses for several reasons. So make sure you have an employment lawyer review the termination clause in your employment contract to ensure that it will withstand judicial scrutiny.

My final blog will discuss different ways to structure termination payments in a termination clause as well as the benefits of offering reference letters and outplacement counselling to some terminated employees.

For over 30 years, Doug MacLeod of the MacLeod Law Firm (www.macleodlawfirm.ca)  has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at doug@macleodlawfirm.ca

 

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