The end of the year can be a busy time for companies as they evaluate current staffing levels, particularly in the context of setting the next year’s budget. Whether the objective is moving on under-performers or making tough downsizing decisions in the face of trimmed budgets, terminations need to be entered into with careful planning and, dare we say it, a discussion with your employment lawyer.
Terminations are tough – they are usually difficult on the company, the remaining employees, management and of course the departing employee. Having a fair and efficient process established by way of contract, in advance, is the best way to manage what is an evitable part of having employees. If you aren’t considering terminating employment relationships at this time, it is an even better time to invest in having your employment contracts updated and termination procedures clarified. See our recent blog post on why having a comprehensive employment contract matters.
The following discussion pertains to the non-unionized workplace – if you have a collective agreement at your workplace the framework for terminations is completely different. This discussion also assumes a “Without Cause” termination. A “For Cause” termination in which the employer is legally entitled to terminate employment with no notice to the employee is an entirely different discussion which should be had with your employment lawyer prior to taking any steps to implement.
Step 1: Determine which employee(s) will have their employment terminated and ensure that there are no human rights considerations to address in that decision (see “Setting the Framework” below).
Step 2: Determine whether, in addition to the Employment Standards Act (Ontario), there is a binding, enforceable contract which will determine what notice of termination is required, or whether the common law will apply to determine notice (See “Reviewing Obligations” below).
Step 3: Calculate, as accurately as possible, the correct notice period to provide the employee with, as well as addressing whether notice will be working notice, pay in lieu or a lump sum payment. Address issues of benefit coverage and how all forms of compensation will be dealt with during the notice period (see “Determining Notice Obligations” below).
Setting The Framework:
A common misconception of employers is that they need a reason to terminate the employment of an employee. Some employers believe that they need substantial documentation of poor performance or workplace malfeasance to justify a termination. With some exceptions, there does not need to be a reason to terminate the employment of an employee: the relevant question is only what obligations the employer has to the terminated employee regarding notice of termination and obligations during the notice period.
The main exception to this rule is that the decision to terminate any particular employee may not be tainted in any way by a discriminatory reason. For example, if a company sets out to trim 10% of it’s workforce and starts by terminating all employees who are pregnant or on parental leave, a human rights complaint would be likely to follow.
A company can terminate the employment of an employee for whom there are potential human rights concerns, provided that they can establish those factors did not play any part in the decision to terminate that employee. For example, if a company determines that to meet it’s budget constraints it will terminate all employees with less than three years of service with the company, and one of those employees happens to be pregnant, the decision to terminate can be established to have been taken without consideration of factors which might lead to a discrimination claim.
Clearly, decisions to terminate any particular employee or group of employees need to be undertaken with great care.
Once a decision has been made to terminate the employment of an employee or group of employees, the next step is to assess the company’s obligations to the employee(s). In Ontario, obligations to employees arise from three different sources: the Employment Standards Act (Ontario) (the “ESA”), contracts and the common law.
- The ESA contains what can be described as “mandatory minimums” which dictate the minimum expectations of any employment relationship in Ontario. An employer and employee are bound by this legislation and, for the most part, cannot contract out of these obligations. Thus, when determining how much notice of termination is required to be provided to an employee, that notice can be no less than that required by the ESA.
- The “common law” is the obligations which have been defined over the course of time by judges, rendering decisions in cases before them. Common law is an imperfect guide for determining notice obligations to employees. While the ESA sets out bare minimums which, for the most part, take no account for the particular circumstances of an employer and employee, the common law assesses those particular circumstances, considering questions like the age, job seniority, expertise and training of the employee, as well as the job market.
The common law is imperfect as a guide because it is almost impossible to find a case to guide the notice determination which is exactly the same as the case which the employer is forced to determine. As well, it is often the most egregious cases which end up being litigated in courts, resulting in a situation where the common law, as a guideline, tends towards more lengthy notice periods. The good news is that the common law expectations can be overridden by a clear and enforceable employment contract which establishes an agreed upon notice period.
- Finally, written employment contracts should contain provisions in which the employer and employee have agreed in advance on what notice will be provided upon the termination of the employment agreement. The employment contract, as well as the termination provisions themselves, must be enforceable to be relevant: adequate consideration must have been provided for the contract, the contract must still be relevant (i.e. the employee must still be in the position they were hired for) and the termination provisions must themselves be enforceable. See our blog post on recent case law regarding the enforceability of termination provisions.
If there is no enforceable termination provision in a contract to guide the notice calculation, either because there is no such provision or the provision which is in the contract is not enforceable, then the common law notice calculations discussed above will provide the guide. If a company does not have enforceable termination provisions in contracts with it’s employees, it is missing the best opportunity to provide certainty around termination obligations: new, enforceable employment contracts should be a top priority in that case. See our blog post on contractual termination provisions.
Determining Notice Obligations:
Once an employer has determined the source for the calculation of the notice they are required to provide for the termination of employment, the calculation must be made:
- The starting point is always the ESA as the notice period cannot be less than that required by the ESA. With some exceptions, all employers are required to provide a minimum of one week notice of termination of employer per year of employment with the company (with the first two years of employment being calculated slightly differently). In addition, if the employer either has a payroll of $2.5 million or more OR is permanently discontinuing all or part of it’s business and is terminating 50 or more employees within six months as a result of that discontinuance, then the employer must provide additional notice to employees with 5 or more years of service with the employer. That notice will be equal to one week per year of service, up to 26 weeks. The notice can be provided as working notice, or pay in lieu of notice.
Very importantly, benefits regularly provided by the employer during employment must be continued during the notice period. These are rough calculations of the ESA notice requirements as there are numerous exceptions, provisions for temporary layoffs etc. A good review of ESA requirements can be found on the Ontario Ministry of Labour site here.
- If an employer has determined that there is a valid employment contract with enforceable termination provisions, the calculation should be fairly straight forward. However, unless the termination provisions in the contract have been drafted to consider all potential aspects of the employment relationship, there may still be substantial room for negotiation on the part of the employee. For example, has the treatment of discretionary bonus’ been addressed in the termination provision? If compensation is variable, has a formula for compensation during the notice period been provided? Have stock options been addressed, if not already addressed in a company stock option plan? Does the contract contain provisions for what happens if the employee secures comparable employment during the notice period? The more clearly an employment contract is drafted, the more certain the expectations of both the employer and employee will be.
- Finally, if there is no valid employment contract with enforceable termination provisions, an attempt to calculate notice according to the rules established by the common law must be made. Provisions of notice which seek to rely solely upon the ESA minimums are likely to be challenged by departing employees, particularly if they are more senior and highly skilled employees. Providing a reasonable estimation of what an employee is likely to be entitled to, should that employee take their case before a judge, is the best way to avoid lengthy negotiations with the employee and their legal counsel.
In the common law, there is an expectation that terminated employees will be seeking alternate employment and will be attempting to mitigate the damages they are suffering by losing their job. It is advisable that in the structuring of a termination package provisions be made for the employee to secure employment and the notice period to then end – often with provisions for payment to the terminated employee of some portion of the remaining notice.
Care must be taken to continue during the notice period all benefits which the employee was entitled to during employment. Review with the company benefit provider if the employee is entitled to remain on the company benefit plan after termination of employment. If not, address the provision of alternate benefit coverage. Address the same questions noted above regarding how compensation is calculated during the notice period, whether bonus’ were earned prior to termination and are payable and whether any are owing during the notice period. Address stock options if relevant. Providing a fair and comprehensive termination package from the outset is the best way to head off lengthy and costly negotiations.
A Few Final Thoughts on Terminations:
- Notice of termination of employment is not effective until it is in writing and a clear date for the termination is provided.
- When providing any notice or compensation over and above that required by the ESA or by the terms of an employment contract, always make the provision of that notice or compensation contingent upon the employee signing a full and final release of all claims against the company. When drafting termination clauses in an employment contract, we always build in a Release in exchange for any notice which is above the ESA minimums.
- Despite what almost all employers believe, or want to believe, there is no such thing in Ontario law as “near cause” for termination. When an employer elects to terminate employment as a result of underperformance by an employee, there is often a sentiment that those employees are deserving of less notice of termination than the “innocent employee” terminated because of financial considerations or restructuring. This simply is not the case, legally. The minimum notice entitlement of an employee, whether that be found in the ESA, a contract or the common law, is not reduced or increased according to any assessment (subjective or objective) of that employee’s performance. This does not preclude an employer from providing notice over an above to an employee for whom they feel a particular obligation or affection.
- The manner of termination matters. There are a multitude of good business reasons for treating departing employees with respect and dignity, but there are also legal reasons. Embarrassing the employee, threatening the employee with a “With Cause” termination, being heavy-handed in the removal of the employee from the office can all lead to legal action and the award of punitive damages against an employer. The law in this area is evolving and starting to swing back to favour a more balanced approach to assessing these sorts of additional damages, but extreme caution should still be taken in the termination notification.
- If a downsizing is being considered and the company hopes to make it temporary, a temporary layoff can be considered instead of a permanent termination of employment. Such a layoff needs to be discussed with your employment lawyer in advance as, while the ESA provides for temporary layoffs, the common law does not. Unless the potential of a temporary layoff has been considered and agreed to in an employment contract, attempting a temporary layoff will trigger a contractual/ common law termination and the resulting obligations.
- Employers can and do provide “working notice” in appropriate circumstances. If this is a viable employment situation then it should be considered, taking account of the HR implications. However, caution needs to be taken, particularly if, at the end of the notice period the employer wishes to keep the employee for an additional time period, for example to finish a particular project. The extension of the working relationship will almost certainly negate the notice already provided and a new agreement will have to be reached.
As always, this post contains general guidelines to consider and discuss, it does not constitute legal advice on a specific employment situation.