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Going global: Ontario Superior Court grants severance pay based on non-Ontario payroll

A recent French language decision from the Ontario Superior Court of Justice indicates that more employers could be subject to liability for an employee entitlement often relegated to the role of afterthought: severance pay.

Severance pay in Ontario

In Ontario, employees with more than five years’ service are entitled to severance pay if at relevant times their employer had a payroll of over $2.5 million. Even without a payroll over $2.5 million employers may owe severance pay when at least 50 employees are terminated within a rolling six month period.

Severance pay is calculated at one week’s pay per year of service (pro-rated for completed additional months), to a maximum of 26 weeks’ pay. An employee’s severance pay entitlement is in addition to any notice requirement under the Employment Standards Act (the “ESA”) and, unlike the ESA notice requirement which an employer can choose to provide by way of working notice or pay in lieu, severance pay can never be worked off.

Paquette v Quadraspec Inc.

Mr. Paquette commenced a wrongful dismissal action. He had been dismissed without cause and asserted that he was entitled to ESA severance pay.

There was no dispute that Mr. Paquette had over five years’ service, but Quadraspec’s payroll in Ontario was less than $2.5 million and so it asserted that he was not entitled to ESA severance pay.

Mr. Paquette argued that the court should consider Quadraspec’s total national payroll. There was no dispute that if the court found that the calculation should include those extra-provincial amounts, Quadraspec’s payroll exceeded $2.5 million.

Not surprisingly, Quadraspec argued that only its payroll in Ontario was relevant for determining an entitlement under Ontario’s ESA.

Quadraspec’s position was supported by the 2011 decision of the same court in Altman v Steve’s Music Store. In that case, an employee was denied severance pay on the basis that the employer’s Ontario payroll was less than $2.5 million, and in doing so expressly refused to account for the employer’s payroll in Québec (which was sufficient when added to its Ontario payroll to exceed $2.5 million). In Altman, the court relied on previous decisions in which a similar conclusion was drawn for other entitlements under the Act.

Before Paquette, it was generally accepted that Altman reflected the current law.

However, in Paquette, Justice Kane outright rejected the analysis in Altman and found that the employee’s eligibility for severance pay should be based on Quadraspec’s national payroll.

In so finding, the Court distinguished the Altman line of cases on the basis that they relied on the wrong principled analysis. Boiled down, the Court in Paquette found that in Altman, the principle that Ontario’s Legislature cannot take jurisdiction over payroll outside the Province was conflated with the conclusion that the ESA could not include payroll outside the Province when determining entitlements.

The Court found that if the Ontario Legislature had intended to exclude extra-provincial payroll it could have done so explicitly. Following standard rules of statutory interpretation, the Court held that the omission was intentional, and so the Legislature must have intended that an employer’s total payroll, including that which falls outside Ontario, is relevant to the calculation of ESA severance entitlements.

As a consequence, the Court awarded Mr. Paquette ESA severance pay.

Notably, although Altman is the most recent court decision to directly address this severance pay entitlement issue, but other cases not considered in Paquette analyzed precisely this issue and found that, reading the ESA in context as a whole (which is also a standard rule of statutory interpretation), it is reasonable to conclude the Legislature intended only to include Ontario payroll. See for example, Genesta Inc. (2007 Arbitration, Knopf).

What employers should know

The rejection in Paquette of the conclusion in Altman leaves Ontario employers in the curious position of having two cases from the Superior Court stating completely opposite opinions. It seems likely that the decision of a higher court will be required to resolve this conflict. As it stands, however, Paquette is the most recent case dealing with the question of eligibility for severance pay, and explicitly rejects the reasoning in the Altman line of cases.

Going forward this decision could significantly increase the number of employers potentially liable for severance pay entitlements to their employees, especially those companies engaged in significant cross-border undertakings.

Although Paquette was concerned with extra-provincial and not international payroll, there is little doubt that the reasoning in Paquette would support inclusion of foreign payroll in many cases. For example, an employer with one employee in Ontario but with a substantial payroll in India could find that it owes that employee ESA severance pay. We wonder if the Legislature can truly be taken to have intended such an absurd result.

Perhaps most concerning, is that many employers who operate across provincial and national lines will utilize different corporate vehicles. It is settled law (at least it is today) that if two companies were found to be a single employer within meaning of the ESA (section 4) their payrolls would be combined to determine whether ESA severance pay were payable. It is one thing to order the simple disclosure of an employer’s payroll in several jurisdictions. It is quite another to determine whether to declare two companies a single employer under the ESA. The complexity of this issue, more typically adjudicated when unions seek to have their bargaining rights protected after a sale or acquisition, could render the time and expense of litigation prohibitive and even punitive to the parties and tax limited judicial and tribunal resources.

Ontario employers should carefully track this issue as the caselaw evolves. Employers planning terminations, especially when planning significant reorganizations, sales or acquisitions, should add this to their due diligence checklist.

By Jeremy Schwartz and Frank Portman

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Stringer LLP

Employment and Labour lawyers at Stringer LLP
Stringer LLP is a leader in Canadian HR law. For over 45 years, they have taken a client-centered approach to responsive service, representing employers with labour relations and employment problems. Their firm’s practice covers a broad spectrum of HR law, including employment law, occupational health & safety, labour relations and arbitration, human rights, workers’ compensation and pay equity, as well as issues under the Accessibility for Ontarians with Disabilities Act. They also provide training, seminars and conferences on the above topics. Read more
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