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OLRB rules that when it comes to severance it’s Ontario-based operations alone

severance

Should the payroll of employees outside Ontario be included in the calculation of the payroll under section 64 of the Employment Standards Act, 2000?

According to a decision of the Ontario Labour Relations Board, released late in 2018, Doug Hawkes v. Max Aicher (North America) Limited, 2018 CanLII 125999 (ON LRB), it is only Ontario-based employment and operations that is captured by section 3 and therefore section 64 of the ESA.

This decision is a victory for large, multijurisdictional employers with more limited operations in Ontario.

Facts

This case was an application for review, filed pursuant to section 116 of the Employment Standards Act, 2000, S.O. 2000, c.41, (the “Act”). In his application, Mr. Hawkes sought review of the January 25, 2017 decision of an Employment Standards Officer (“ESO”), who determined that he was not entitled to severance pay pursuant to section 64 of the Act.

Mr. Hawkes was employed by the responding party, Max Aicher (North America) Limited (“MANA”), a corporation which operates in the steel industry in Ontario. MANA is a wholly owned subsidiary of Max Aicher GmbH & Co KG (“MAG”), a company created under the laws of Germany, and headquartered in Bavaria.

Mr. Hawkes was employed by MANA from November 2010 to October 7, 2015 in the position of Maintenance Manager. He accepted an offer of continued employment from US Steel Canada Inc. (“US Steel) when a sale of assets occurred between US Steel and MANA in November 2010. Mr. Hawkes had been employed by US Steel and its predecessor Stelco between August, 1977 and November 2010.

Decision of the ESO

The ESO concluded that Mr. Hawkes was entitled to termination pay and vacation pay, and ordered payment of same. However, having found that MANA did not have a payroll of $2.5 million or more pursuant to section 64(2)(a)(b) of the Act, she further concluded that Mr. Hawkes was not entitled to severance pay. In arriving at this further conclusion, she found that only salaries under Ontario jurisdiction are to be considered in calculating the payroll threshold, and that the salaries of employees of a temporary agency are not to be considered in calculating MANA’s payroll, since these temporary workers were not employed by MANA.

Issue on appeal

According to the reported decision, there were a number of issues raised in the pleadings: whether the application was timely, whether MAG and MANA are related companies within the meaning of the Act, whether the salaries of temporary agency employees should be considered as part of MANA’s payroll, and whether MAG’s global payroll is included in the assessment of MANA’s payroll.

The sole issue decided by the Board in its decision was whether the payroll of employees outside Ontario should be included in the calculation of the payroll under section 64 of the Act.

Positions and arguments

Mr. Hawkes argued that the payrolls of both MANA and MAG ought to be considered together in determining MANA’s total payroll for purposes of calculating severance under section 64(1). He submitted that the Act has a remedial purpose, and is to be given a broad and liberal interpretation which favours extension of benefits under the Act, rather than their curtailment. Mr. Hawkes further relied on the decision of the Ontario Superior Court in Paquette v. Quadraspec Inc., [2014] O.J. No. 5484 (“Paquette”), submitting that its reasoning, which resulted in a finding that an employer’s national payroll can be considered for the purposes of computing a $2.5 million payroll, should apply similarly to a global payroll.

Mr. Hawkes argued that section 3(1) of the Act does not apply to the analysis so as to limit the application of the Act to a company’s Ontario payroll. Since the applicant worked in Ontario, and had an Ontario employer, only section 64, which sets out entitlement to severance pay, applies. The applicant argued that subsection 64(1)(b) applies to the situation here, even though MANA does not have a payroll in Ontario exceeding $2.5 million. Subsection 64(1)(b) does not specify that computation of severance pay is based on an Ontario payroll, compared to specific reference to “Ontario” in the definition of payroll in the Pay Equity Act, R.S.O. 1990, c. P.7. Therefore, subsection 64(1)(b) should not be narrowly constructed to incorporate the word “Ontario”. Moreover, subsection 64(2), which speaks to computation of payroll, refers to “all of the employer’s employees”, without restriction to only those employees located in Ontario. The applicant argued that if there are related companies, this provision would apply to all of the employer’s employees, regardless of geographic location. The applicant submitted that the decisions to date that were informed by subsection 3(1) are not applicable. The applicant submitted that there would be no harm in accepting his argument, since the Act’s intent is to exempt smaller employers from the obligation to pay severance. The effect of recognizing a global payroll would not be to “open the floodgates”, since smaller employers would not meet the threshold, and only companies who are found to be related to larger companies outside Ontario would have the financial obligation of severance.

For its part, MANA asserted that only its payroll in Ontario is relevant. In MANA’s submission, the Act is specifically designed to regulate Ontario-based employment. While the Court in Paquette, noted that since the criterion of “Ontario” was not inserted into the severance pay provisions in section 64, it overlooked the fact that the Act is designed to regulate Ontario-based employment. Subsection 3(1) is a general provision which sets the scope of the Act’s application to all other provisions of the Act. As such, it would be redundant to specify in every section of the Act that the section applies to Ontario-based employment.

Moreover, MANA argued that Paquette, is distinguishable since it was decided on narrow facts which are absent in this case. Paquette did not address whether an employer’s international payroll should be considered in computing a $2.5 million payroll. MANA submitted the analysis in Paquette, is wrong. It is contrary to both the Act and “Policy and Interpretation Manual” pursuant the Act.

MANA and the Director of Employment Standards (“DES”) rely on the decisions of the Board and of the Ontario courts decided prior to Paquette, all of which concluded that section 64(1)(b) of the Act was directed to Ontario-based employment, and it is the payroll of an employer’s Ontario operation which is relevant for the Act’s purposes. [Citations omitted.]

Both MANA and the DES pointed to the practical issues of enforcement by the Ministry of Labour and the Board if the applicant’s position that foreign operations should be considered were accepted. The DES described the result as “absurd”, given the absence of authority to compel production and issue orders regarding foreign payrolls. Such circumstance supports the obvious intent to confine the payroll computation to Ontario.

The DES agreed that the Act should be interpreted broadly; noting however, analogous to the caution articulated by the Court of Appeal regarding the interpretation of public welfare legislation, that a broad and liberal interpretation of the Act’s provisions is not limitless.

Like MANA, the DES submitted that the applicant’s interpretation of section 64 is inconsistent with Board jurisprudence and other case law and does not accord with the overall scheme of the Act.

The DES maintained that section 3 of the Act is an over-arching provision which sets the boundaries for employment relationships in Ontario. Section 64(1)(b) should be informed by section 3(1), as targeting an Ontario payroll. The Court in Tullet, read “Ontario” into section 64(1), which is consistent with the Board’s jurisprudence, and the scheme of the Act. The DES pointed out, by example, that section 58 (mass termination) similarly doesn’t place the word “Ontario” in the definition of “establishment”.

The DES also argued that Paquette, is distinguishable on its facts and reasoning, contending as did MANA above, that applicant is asking the Board to extend the reasoning in Paquette, to a different factual scenario involving a related employer’s global payroll where the related employer has no operations in Ontario. The DES submitted that it is reasonable for the Board to follow its own jurisprudence and that developed by the courts prior to Paquette, and not to follow the decision in Paquette, since the Board is a specialized tribunal which has primary responsibility for the interpretation of the Act and is not bound by a Superior Court decision arising out of a civil claim, especially in the context of the Board’s interpreting its own home statute.

Decision

Writing on behalf of the Board, Vice Chair Gita Anand wrote the following reasons in support of her decision that it is only Ontario-based employment and operations that is captured by section 3 and therefore section 64 of the Act.

[19] In Paquette, the Superior Court rejected an interpretation of sections 64(1)(b) and 64(2) which restricted the computation of an employer’s total payroll to only those employed by the employer in its Ontario operations. The Court, noting that the criterion of “Ontario” is absent from section 64, concluded that there is no reason to interpret the provisions of section 64 so as to narrow their scope by reading in the words “in Ontario”, and given the purpose of the provision is to protect small businesses from the financial burden of paying severance, these provisions ought to be interpreted expansively such that the payroll calculation ought to include all of an employer’s employees, even if some worked outside Ontario, in Quebec.

[20] Section 3 of the Act imposes limits on the application of the employment standards in the Act. Section 3(1) provides that the employment standards in the Act apply to “an employee and his or her employer” if the work is performed in Ontario, or if the work performed outside Ontario is a continuation of work performed in Ontario.

[21] Prior to Paquette, the Board and the courts interpreted section 64 with regard to the limits set out in section 3(1). The court in Tullett, concluded at that section 2(2) [now 3(1)] is directed to Ontario based employment, and that this section informed the interpretation of the overall scheme of the Act, even if the employee’s entitlement to severance pay was restricted. At paragraph 4, the Court stated:

4 Severance pay entitlement arises solely as a creation of statute when an Ontario based employee is terminated after five years of service if the employer (as Tullett Canada did) had a payroll of $2.5 million or more. Section 2(2) is directed to Ontario based employment: (a) specifically referred to the employment being for work to be performed in Ontario; and (b) only contemplates a situation where the work may be both in and out of Ontario provided the work out of Ontario is a continuation of the work in Ontario. It would seem that the Adjudicator leapt over this hurdle without appreciating that it was a foundation element of the case. This omission is in our view fatal and presents patent unreasonableness in her conclusion..[…] Even if the statutory purpose of the ESA is to accord a terminated employee with severance pay — that entitlement is subject to the conditions imposed by the ESA itself which would thereby impact as to what was “the true intent and purpose of this Act” (s. 12).

[22] The Board in Northland Superior, adopted the court’s conclusion, finding at paragraph 15:

15. The Ontario legislature has no authority to legislate concerning the payrolls of other provinces. It has legislative authority with respect to business operating in Ontario. It is the payroll of an employer’s operation in Ontario which is relevant for the purposes of the Act. Just as an employee’s period of work outside of Ontario cannot be taken into account in the calculation of the severance pay due to them (unless that work were incidental to their work in Ontario), so an employer’s payroll is restricted to those employed in Ontario […] As the employers submit, the Board’s jurisdiction is with respect to Ontario only. Although the Act is to be broadly and generously interpreted, I conclude that the payroll which applies is that of the two companies in their Ontario operations.

[23] In this case, the applicant is asking the Board to extend the reasoning in Paquette to a scenario to include a related employer’s global payroll in the computation of payroll for the purposes of section 64 of the Act, where the related employer has no employees in Ontario. I reject such a request for the following reasons.

[24] First, Paquette, supra is distinguishable. It is factually different and, it did not address the interaction of section 3(1) and section 64 of the Act as did the court in Tullett. Second, I agree with the interpretation and analysis of the jurisprudence prior to Paquette, which interprets section 64 in light of section 3(1) of the Act. Third, I am not persuaded in the circumstances of this case that there is any reason to depart from the pre-Paquette line of cases.

[25] In this case, the applicant was employed in Ontario by a company operating in Ontario. In my view, having regard to the Act as a whole, while an employer may have operations and payrolls outside Ontario, it is only Ontario-based employment and operations that is captured by section 3 and therefore section 64 of the Act. The absence of the words “in Ontario” in section 64 does not mean that the provisions are unrestricted. The words “in Ontario” are found in section 3 and their effect is to apply to employers whose employees perform work in Ontario (or whose work is a continuation of work performed in Ontario). It does not make sense to presume that provincial legislation could affect employment or operations anywhere but in Ontario. Therefore, I find that MAG’s global payroll Ontario should not be included for the purposes of calculating payroll under section 64 of the Act. Calculation of payroll to determine entitlement to severance pay should be restricted to MANA’s payroll in Ontario.

Commentary

I reviewed the decision of the Superior Court in Paquette in my earlier post titled The Requirement to Pay Severance in Ontario – The Decision in Paquette c. Quadraspec Inc., 2014 ONCS 2431 .

In that post I commented as follows:

The change in the approach to the law could be huge for foreign-to-Ontario employers.

Consider, for example, an employee earning $52,000 a year in base salary. If the employee has been employed by his employer for 10 years, here is what the change in the approach to the law means.

Under the old [i.e. pre-Paquette] approach, the employee would be entitled to no less than eight weeks of statutory notice. That notice could be provided as working notice, meaning that the employee would be obligated to work for his employer until the set date provided in the notice. If the employer’s total payroll with respect to its Ontario operations was less than $2.5 million, then the employee would not be entitled to anything further – subject to any common law rights to increased notice.

Under the new approach, however, even after satisfying the employee’s notice entitlements, the employee would still be entitled to a severance payment if the employer’s total payroll, including its employees outside of Ontario, exceeded the statutory threshold. In this example, the employee’s entitlement would be 10 weeks x $1,000/week base salary = $10,000!

Of course, if the employee had been employed for 15 years, the entitlement would be $15,000. If the employee’s salary was higher, say $104,000 per year for easy math, then the entitlements would be doubled.

All of this has the very real potential to increase employer’s contingent labour costs.

It is important to note that there is currently no way for employers to avoid this statutory requirement. Subject to the decision being overturned on appeal, this new decision and approach may have just significantly increased the costs of doing business in Ontario.

Notwithstanding this change, it is important for employers to note that severance is often but a small piece of an employee’s rights on termination.

The OLRB’s decision in Hawkes may signal a return to the pre-Paquette era, a decision that will no doubt be welcomed by most employers. What the Superior Court elects to do in future cases is yet to be seen. One suspects that until an appellate court considers this matter, we may continue to see a debate.

Sean Bawden

Sean Bawden is a partner with the law firm of Kelly Santini LLP. He was called to the bar in 2008 and practices in the areas of employment law and civil litigation. He has also taught Trial Advocacy for Paralegals and Small Claims Court Practice at Algonquin College. He is a trustee of the County of Carleton Law Association. He is also a four-time OSSC curling champion. His twitter handle is @SeanBawden.
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