Working notice is like eating at a cheap buffet restaurant – it’s inexpensive, and it seems like a good idea at the time, but the meal doesn’t taste so great within a short period of time. This usually applies to both employers and employees.
I often have employer clients looking for a way to lower the cost of dismissing more expensive employees by providing some or all of the notice in working notice, rather than paying out the full amount owed in cash.
No "At Will" Employment In Canada
For American clients in particular, the cost of terminations in Canada can often seem quite high. We do not have an "at will" employment concept in Canada, so if an employer wishes to dismiss an employee without cause (for business restructuring, redundancy, etc), the employer is essentially breaking the employment contract, which the courts otherwise deem to be a permanent long-term relationship. In order to break that contract, the employer must either give working notice to the employee or make a payment in lieu of that notice
How Much Notice is Required?
Most employment law is governed by provincial statutes, so the amount of notice varies slightly from province to province. In Ontario, there are four sources of notice that could dictate the amount of notice an employer must provide to an employee:
1. Employment Contract – if the parties entered into an employment contract that contains a termination provision, the terms of that contract will apply and will trump any common law (i.e. court) amount or amount required by the Ontario Employment Standards Act (ESA) (assuming the employment contract provides more than that set out in the ESA). This generally applies in the unionized context where the collective agreement will dictate the terms of termination.
2. Termination Pay – the ESA requires that an employer provide 1-8 weeks of notice (or pay in lieu), depending on the years of service of the employee. Termination Pay can either be pay in lieu of notice, or can be provided as a notice period during which the employee is required to continue working. The Ontario Ministry of Labour website provides details on dismissals and the ESA.
3. Severance Pay – in Ontario, an employer must pay Severance Pay in the amount of a week of pay for each year of service (up to a maximum of 26 weeks) if the following apply: the employee was employed by the employer for 5 or more years and (i) the employee is one of 50 or more employees terminated because of a permanent discontinuance of all or part of the business, or (ii) the employer has a payroll of $2.5 million or more. Severance Pay must be provided as a lump sum payment and cannot be provided as working notice.
4. Common Law – The ESA provides the minimum amount employers must provide to employees. Courts will generally award more, taking into consideration an employee’s age, length of service, type of employment and availability of similar employment. Often the common law amount will be in the range of 3-5 weeks of notice for each year of service, depending on the circumstances. This is inclusive of any ESA amounts, not in addition to ESA amounts.
As an example, an employee without an employment contract with 30 years of service at a company with a payroll of at least $2.5 million will be entitled to 8 weeks of Termination Pay and 26 weeks of Severance Pay as a minimum. That’s without considering what a court would offer on top of the ESA amounts.
Payment or Working Notice?
Unless the employment contract says otherwise, and other than Severance Pay which must be paid out as a lump-sum payment, an employer can offer all of the notice as working notice rather than pay. The question is, do you really want to?
Generally, employees prefer the pay in lieu of notice. No one wants to working under the cloud of dismissal, and the clean break gives the employee the time to move on and find a new job.
Generally, employers want to save the money by giving working notice, but here are some of the reasons why many employers in fact opt for the pay in lieu of notice:
- no bang for your buck – rarely does an employee retain his or her enthusiasm for the job and productivity inevitably goes down;
- workplace sabotage – in highly sensitive positions, it is often best to make the clean break so that the employee is not tempted to take business secrets, confidential data or company property with him or her prior to the end of the working notice period;
- the business must go on – if the reason for the dismissal is to bring in fresh talent, why wait out the many months for the employee to finish up the working notice period when you could bring in the fresh talent asap; and
- workplace morale – an unhappy employee on their way out may drag down your other employees and create an atmosphere of low morale.
One option is to combine working notice with a pay in lieu of notice. If, for example, you have decided to give your 30 year employee 18 months notice, you could do 12 months of that notice by way of working notice and pay out the remaining 6 months at the end of the working notice period. In this example, an employer would have to pay at least 6 months as a lump sum payment for Severance Pay in any event, so the combination may be a natural break down of the notice provided.
Cost Effective Decisions
At the end of the day, employers with employees in Canada should balance the cost of a dismissal without cause with the potential cost of litigation. If a company offers a long-term employee little more than the ESA amounts, there is a high likelihood the employee will sue for wrongful dismissal. Even if the court awards the employee only a small amount above the ESA requirements, the hassle, the costs of litigation and the invitation to other employees to do the same will not be worth the several weeks of extra pay a company could have included in the original dismissal offer to the employee.
Additionally, any taint of bad faith or poor treatment during the termination process will invite a court to increase its award. By offering a decent dismissal offer in the first place, a company can hopefully avoid the scrutiny of the court and help contain costs.
Finally, it should be noted that none of the above applies if an employee has been dismissed with cause. An employee who steals, who has a long record of discipline issues, or has engaged in a serious act of violence, for example, all may be grounds for dismissal with cause. In that case, no payment or notice is required.
The threshold of “with cause” is high in Canada, however, and an employer would be wise to think hard about whether it has sufficient evidence to prove dismissal with cause. In the case of any doubt, offer a decent package and be done with it.