Monday, June 16, 2014

Superior Court finds that the severance threshold includes extra-Provincial payroll

Hat tip to Ottawa employment lawyer Sean Bawden for catching this one, Paquette c. Quadraspec Inc., a French-language decision out of Ontario's Superior Court of Justice with important implications.

(If your French is as bad as mine, Google Chrome's translation feature does a pretty decent job of making French-language decisions comprehensible, and Mr. Bawden included a translation of certain critical elements in his own blog.)

The case involved a senior-level employee who worked in Ontario for a Quebec-based employer since the 1980s.  He signed a contract in 1998, entitling him to "deux (2) semaines par année complète de service, jusqu’à concurrence d’un maximum de six (6) mois" - 2 weeks per completed year of service, up to a maximum of six months - or pay in lieu calculated on the basis of base salary alone, paid by instalments.  The pay in lieu clause indicated that it would be paid by salary continuance, and would terminate if new employment was obtained.  As well, the contract did expressly disentitle him to any other payments or damages arising from his termination.

So, under the contract language, upon dismissal he was entitled to six months' pay.

The employee sued, however, making two arguments that he was entitled to more.  Firstly, he argued that he was entitled to statutory severance pay.  Secondly, he argued that the contract was unenforceable for its attempt to contract out of the Employment Standards Act, and therefore that he was entitled to pay in lieu of reasonable notice..

Severance Pay

Statutory severance pay is only payable under certain circumstances, including - most often - that the employer has a payroll over $2.5 million.

Though it isn't expressly put this way in the ESA, the established wisdom has been that only Ontario payroll counts for the purpose of determining if an employer is obligated to pay statutory severance pay.  The OLRB has generally opined that Ontario's ESA lacks the jurisdiction to regulate payroll outside of Ontario, and therefore that only Ontario payroll should count.  It hasn't often arisen in the Superior Court, but when it has, the Superior Court has followed the OLRB's lead...until now.

It's a distinction that matters for Quadraspec.  It has significant operations in Quebec, but less significant operations in Ontario - it has an aggregate payroll over $2.5 million, but an Ontario payroll that doesn't meet the threshold.

Justice Kane reviewed the statutory scheme and its purpose, including a Hansard reference to Minister of Labour William Wrye's justification for the scheme when it was brought to its (more or less) current state in 1987.  Put briefly, severance pay was intended to recognize the skill-specific investment made into a career by long-term employees of large employers, and the legislation intended to capture all large employers, by aggregating the payrolls of the nominal employer with related companies.  For ease of reading, here's the original untranslated text of what Mr. Wrye said.

Justice Kane noted that, had the legislature intended to only capture Ontario payroll, that could easily have been included in the wording of the provision - which, he notes, they did in the Pay Equity Act.

As for the jurisdictional objections raised in the earlier jurisprudence, Justice Kane rejects that position:  We aren't regulating what employers do in other jurisdictions; we're regulating operations in Ontario by looking at the size of the employer, and there's no reason that we can't observe their operations outside of Ontario when doing so.

Accordingly, Mr. Paquette was entitled to severance pay.

Validity of the Contract

There may well be a few challenges to the contract's validity, but Justice Kane's decision focused on the issue of group benefits.

The wording of the provision was pretty clear:  If you're fired without notice, you'll get pay in lieu on the following basis, and you will get nothing else, "except for wages, vacation pay, and other benefits earned and unpaid at the time of termination. [Translation]"

Justice Kane felt that this expressly denied any entitlement on the employee to have his group benefits continued through the statutory notice period, as required by the ESA.  By expressly conceding 'benefits earned and unpaid at the time of termination', and denying everything else, it wouldn't make sense to argue that the contract doesn't block an obligation to continue group benefits not yet earned at the time of termination.

The employer argued that the contract was silent on benefits, however, and that the case law supports a proposition that - in silence - the contract should be interpreted in a way that complies with the ESA, relying on a line of cases going back to the 1998 decision of the Ontario Court of Appeal in MacDonald v. ADGA Systems International.

(By way of background, MacDonald involved a case where the contract entitled either party to terminate the contract by giving "not less than" a month's notice.  The trial judge had concluded that this language didn't create a ceiling at all, but merely established a higher floor, and therefore didn't conflict with the ESA, but also didn't displace the common law presumption of reasonable notice.  The Court of Appeal agreed that it didn't conflict with the ESA, but felt that it did demonstrate an intention by the parties to displace the common law presumption of reasonable notice.  This case remains good law in Ontario.)

Accordingly, the contractual termination clause is void, and the employee is entitled to pay in lieu of reasonable notice at common law.


The severance analysis is detailed and compelling, with a better analysis of the purpose of the statutory provision than I've seen in any of the opposing jurisprudence.  I wouldn't call the question settled, but Justice Kane makes a good case.

Mr. Bawden, in his entry, expressed some concern that Justice Kane's decision, at paragraph 41, appears to conflict with MacDonald.  Justice Kane wrote that the defendant can't implement a detailed 15-page contract and then ask to receive the benefit of terms that are absent or unclear.  It's not an unusual way of looking at contract interpretation, but it pretty much flies directly in the face of the Court of Appeal's reasons in MacDonald.

Personally, I've always had a bit of trouble with MacDonald.  It seems to me that there are two ways of looking at the language in that case:  Either as restrictive, with the effect that neither party can terminate the contract on less than a month's notice, or as permissive, creating a contractual entitlement to terminate the contract so long as at least a month's notice is given.  When you look at it in light of the former, you can see the trial judge's analysis:  All it does is create a floor, but there may be other terms or statutory provisions creating additional entitlements.  If you look at it in light of the latter, and say that it creates a free-standing contractual entitlement to terminate the contract on a month's notice, that would in fact be a clear attempt to contract out of the ESA.  There's simply no basis for interpreting the language as, on the one hand, displacing the common law entitlement to reasonable but, on the other hand, not attempting to limit entitlements to a month, which can be less than the ESA minimums.

Still, MacDonald is a close case, with unusually minimalistic contract language:  It set a minimum period of actual notice, and did not have language excluding potential further entitlements.  In that sense, it is very different from the contract language at issue in Paquette.  Notwithstanding Justice Kane's invocation of contra proferentum-style language (that the contract should be interpreted against the party that drafted it), I would suggest that it's pretty generous to find any ambiguity at all in the language.  As Justice Kane pointed out, the contract created a total obstacle to any claim beyond 26 weeks' base salary, created an exception for accrued salary, vacation, and other benefits, and limited this exception to amounts unpaid at the time of termination.  The defendant argued that it didn't specifically say that no benefits would be continued past the termination date...but it really doesn't need to say that specifically, when it's the necessary consequence of the language they do use.

So the lesson for employers - and lawyers drafting contracts - is this:  With typical 'ceiling' language (that there are no entitlements beyond those in the contract), it's really when you start restricting the contents of the notice period that you start running into trouble, because if you haven't caught all ESA entitlements, you really need ESA saving language.  That's not at all inconsistent with MacDonald.

Beyond that, there are other red flags with the contract language, too.  The "completed years of service" language is the first alarm bell, though probably not an issue in the context of this case, but I *have* seen new hire contracts using very similar termination language, and without ESA saving language, that runs into problems.  (In particular, consider the entitlements of a 6-month employee under such language:  Under the ESA, such an employee would be entitled to no less than a week's pay; with contractual language such as this, such an employee would be entitled to nothing.  Clear attempt to contract out of the ESA.  And there's a growing line of cases making it clear that, even if the contract gives you ESA-sufficient entitlements as at the actual termination date, formulaic deficiency will void the clause anyways.  That said, in a case such as this, where the contract was signed years after the start date, it's less likely to be an issue.)

Limiting entitlements to 'base salary' can be a fatal problem in ways other than benefits, too.  I don't see any justification for excluding Mr. Paquette's payable commission through the statutory notice period.

Likewise, this contract language seems to fairly expressly exclude the prospect of statutory severance pay beyond the contractual amounts:  You'll get up to six months' pay, and nothing beyond that.  The problem becomes that severance pay plus statutory notice can cap out above that threshold.

But perhaps the most obviously fatal flaw with this language is the mitigation clawback clause:  It expressly entitles the employer to discontinue pay in lieu of notice as soon as the employee obtains replacement employment, the problem being that statutory minimum entitlements are not subject to mitigation.  If Mr. Paquette obtained a new job two weeks after his dismissal, the contract would entitle him to nothing beyond two weeks' pay, despite the fact that the ESA would entitle him to a full 8 weeks' pay in lieu of notice (plus severance pay, as it turns out) regardless of mitigation earnings.

Such language is becoming more common, following the Bowes v. Goss Power Products decision, and I anticipate more than a few contracts being set aside for failing to account for the mitigation-proof nature of statutory minimum entitlements.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

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