It was not always so obvious - at least, not for statutory severance. It used to be a disputed issue, subject to conflicting jurisprudence, until the debate was settled eighteen years ago by the Ontario Court of Appeal in the case of Stevens v. Globe & Mail, finding that statutory severance should be treated like statutory notice, and deducted from common law entitlements.
It's a proposition that has not arisen particularly frequently in the case law since then. In the case of Antonacci v. Great Atlantic & Pacific Company of Canada, Limited, in 2000, the Court of Appeal referred back to that case. (In recent years there have only been a few reported citations of Stevens, but more for its proposition on when interest starts accruing, rather than the interaction between statutory severance and common law damages.)
By way of background, it's important to understand that this is only an issue at all in a relatively small subset of cases. Most employees are entitled to what we call 'statutory notice', which is a modest entitlement capping out at 8 weeks for long-service employees. Only certain employees (i.e. employees with more than 5 years of service) working for certain employers (usually employers with payrolls exceeding $2.5 million) have severance entitlements, but those entitlements can go significantly higher, up to six months' pay. (This is in addition to statutory notice.)
There's one other central distinguishing difference between statutory notice and statutory severance: An employer can elect to satisfy its notice obligations by way of actual notice or pay in lieu of notice. Severance pay, where applicable, usually has to take the form of a lump sum payment. There are also slightly different tax treatments available, impacts on continuation of benefits, and different treatments of non-continuous employment.)
In recent years, the Supreme Court of Canada has largely worked on streamlining employment law with the first principles of contract law. To a lesser extent, the Ontario Court of Appeal has done the same. (The Court of Appeal has even rejected other "well-settled" doctrines of law to return to first principles of contract law, as in Bowes v. Goss Power Products Ltd.) So let's attack this problem from a first principles perspective:
Suppose that I'm a major Ontario corporation, and you've worked for me for 15 years, and suppose that, in the circumstances, you are entitled to 12 months' notice. There are three core elements governing your termination entitlements:
- Under the ESA, you are entitled to 8 weeks notice or pay in lieu of notice;
- Under the ESA, you are entitled to severance pay equivalent to 15 weeks' salary (well, maybe a little over 15); and
- At common law, you are entitled to actual notice of 12 months.
In other words, if I give you a year's notice as the contract requires, that means 67 (or 68) weeks of salary in your pocket. (Of course, you have to work for 52 weeks of that, but that's not generally considered relevant in employment law.) None of that is controversial - it's a pretty straightforward application of the law, and the OLRB has consistently held that additional actual notice cannot satisfy statutory severance obligations. (See, for example, Assurant Group v. Filion.)
But what if I don't give you actual notice? What if I fire you effective immediately, as is so common?
At the core of contract law lies the 'compensation principle', the notion that you are entitled to be put in the same position as you would be had I complied with the contract. At a glance, it seems fairly simple: Subject (in part) to the duty to mitigate, you are entitled to 67 weeks' pay altogether.
Yet Stevens goes another way. I would pay you 23 weeks' statutory notice and severance shortly following the termination, and then you would sue me for your common law entitlements, and the court would award 52 weeks minus the 23 weeks' wages I already paid you. (It isn't exactly the same as saying '29 more weeks', because statutory severance doesn't include things like compensation for lost health benefits, unlike common law damages.)
The conclusion is that, absent a written contract limiting employees' entitlements to (or near) the statutory minimums, a severance-eligible employee is really not in any better of a position than a severance-ineligible one. It isn't an incoherent policy position, treating most employees more-or-less equally. But, on the current framing of the ESA, it is completely incompatible with the compensation principle.
Time for a Change
In Stevens, the finding ultimately turned on a proposition from a much older case (1982) that statutory termination and severance pay have a shared purpose, being to "cushion the economic dislocation of the employee", and that this overlapped with the purpose of common law pay in lieu of notice. (I'm not sure that this is entirely consistent with the purpose as set out in the 1987 Hansard records we recently reviewed, but this is the standing judicial interpretation.)
However, the law of dismissal has since been refined in the Ontario jurisprudence, recognizing that pay in lieu of notice is an application of the compensation principle, arising from breach of the contract by failing to provide actual notice. See, for example, Taylor v. Brown or Love v. Acuity Investment Management.
Not to say that this proposition wasn't recognized by the Court of Appeal in Stevens, in at least a cursory way. There was a dispute before them as to the nature of pay in lieu of notice, and they ruled on that in a manner consistent with the later cases. But it is not consistent with the later cases to imply as they did that the purpose of common law pay in lieu of notice is to provide the employee with an economic cushion.
The purpose of the obligation to give reasonable notice of termination of an employment contract is to permit the non-terminating party to take the necessary steps to secure its interests prior to termination: For a resignation, that means that an employer is entitled to have enough time to reasonably recruit/train/schedule a new worker to fill in for the resigning one; for a dismissal, it means that an employee is entitled to have enough time to reasonably find a new job.
It's about giving the employee an opportunity to make a smooth transition from one job to the next, and it is not about requiring employers to provide a financial cushion to dismissed employees. (Indeed, pay in lieu of common law notice is often unpaid until well after the notice period ends, meaning it doesn't make for much of a cushion.)
This is why there's a disconnect between the Stevens doctrine and the compensation principle: If you look at pay in lieu of notice as being intended to provide a financial cushion, then you get a doubling of the cushion if you award severance plus common law pay in lieu of notice. But common law pay in lieu of notice isn't really a 'thing'. It's shorthand for damages for breach of the obligation to give actual notice. And when you look at a case where actual notice is given, it doesn't provide any sort of financial cushion at all in the event a new job isn't found by the end of the notice period. (If you're eligible for statutory severance, however, you will get a financial 'cushion', regardless of whether or not you have a new job lined up.)
The only way of reconciling the disconnect would be to read into the implied term of reasonable notice an accounting for severance pay - an implied contractual term reducing the period of reasonable notice, as implied by common law, by the amount of the severance obligation. But that too would be incoherent, because the two obligations are apples and oranges, time (actual notice) versus money (liquidated damages). If you went down that road, it would have to be by creating a time-based reduction in the reasonable notice period based on the time factor used for the calculation of severance - in other words, if severance pay is equal to x weeks salary, then the reasonable notice period implied at common law gets reduced by x weeks. But even aside from the analytical strangeness that would otherwise result, the end result would be to actually treat severance-eligible employees worse than other employees, since severance pay, unlike pay in lieu of notice, isn't calculated on the basis of the whole remuneration package.
What About Treating Everyone Equally?
While the policy considerations underlying the decision in Stevens make a certain degree of sense, the simple reality is that the ESA does not treat everyone equally. If I've worked for over 5 years with a large employer, my statutory entitlements are greater than if I have worked for the same amount of time with a small employer.
The underlying rationale of the distinction is that smaller employers are more vulnerable, and may incur more significant hardship if required to provide severance pay. It's not to say that employees with smaller employers are less deserving of recognition for their service, or a financial cushion, but their interests are being balanced against the interests of employers who cannot afford to provide one.
By turning common law pay in lieu of notice into a great equalizer, the courts superimpose equality over top of a statutory regime that entrenches differential treatment.
In that light, one might regard it as somewhat ironic that smaller employers tend to have more significant obligations on dismissal. Larger employers, with an HR department and a budget for legal fees, are far more likely to implement employment contracts limiting their employees to the statutory minimum. Even with statutory severance (where it applies), that is invariably going to be much less than the common law pay in lieu of notice owed by small employers who didn't hire an expert to draft the contract.
An Alternate Approach: Statutory Reform
One might reasonably question whether or not the $2.5 million payroll threshold for severance obligations remains good public policy in Canada. Indeed, it's easy to argue that it should either be raised or scrapped altogether. $2.5 million was the original threshold implemented in 1987, when severance pay was significantly expanded from its historical roots - in 2014 dollars, that would have been well over $4.5 million.
Unlike, say, minimum wage, there's been no real pressure to raise the threshold. $2.5 million isn't what it used to be - no doubt about it - but at what threshold would we start to feel sympathetic for the poor employer who has to pay a 30-year employee, dismissed without cause, more than 8 weeks pay in lieu of notice? Even with statutory severance, the statutory minimum entitlements are pretty barebones. It would be very cogent to suggest that, in 21st century Canada, employees should be treated equally, regardless of the size of the employer.
I've occasionally seen broader discussion of the need to reform the termination and severance provisions in the ESA. I think there is a lot of room for improvement, though I generally disagree with suggestions that the ESA should completely replace common law notice with more substantial statutory notice. However, a statutory amendment to make severance payable to all long-service employees, regardless of the size of the employer, would probably be very appropriate, whether such statutory severance was in addition to or included within traditional wrongful dismissal damages.
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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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