Termination of Employment and Reasonable Notice

Are employment contracts really necessary? Here are the Reasonable Notice and Bonus Requirements.

I’m always surprised to see how many employers still adopt the “handshake” method when hiring employees. I can understand the temptation to be nostalgic, but these types of employment agreements can leave employers at loss. Especially when the employment relationship ends. Here are some things every employer should consider:

Reasonable Notice

Facts: The employee has worked for you for 7 years. You want to go a different way and he/she’s not part of the picture, so you let him/her go without cause. The law states you must provide either reasonable notice or pay in lieu of notice. How long will this notice be? It depends on whether you have a contract in place.  

Contract: Employment contracts I draft or review for my clients will typically include termination provisions. The provisions set out what will happen when the employment is finished; amongst other things, the notice period that should be provided. Typically the provision will limit notice to the Employment Standards Act (ESA) minimum notice requirements. The ESA sets out the following parameters, depending on years of service:

Employer Notice Period

57 The notice of termination under section 54 shall be given,

(a) at least one week before the termination, if the employee’s period of employment is less than one year;

(b) at least two weeks before the termination, if the employee’s period of employment is one year or more and fewer than three years;

(c) at least three weeks before the termination, if the employee’s period of employment is three years or more and fewer than four years;

(d) at least four weeks before the termination, if the employee’s period of employment is four years or more and fewer than five years;

(e) at least five weeks before the termination, if the employee’s period of employment is five years or more and fewer than six years;

(f) at least six weeks before the termination, if the employee’s period of employment is six years or more and fewer than seven years;

(g) at least seven weeks before the termination, if the employee’s period of employment is seven years or more and fewer than eight years; or

(h) at least eight weeks before the termination, if the employee’s period of employment is eight years or more.  2000, c. 41, s. 57.

So, if drafted properly in the contract, the employee in the above example would have a right to 7 weeks notice.

No Contract

‍If there is no contract in place, the employee is allowed “common law” reasonable notice. Bardal v. Globe & Mail Ltd set the precedent for all wrongful termination cases treating reasonable notice requirements. Although less than 8 pages long, the decision set out what factors should be considered when deciding how much notice an employee should get. It is typically a lot more then what an employee would get under the ESA minimums. Employment adjudicators have added to the Bardal factors and although not exhaustive, the typical considerations are as follows:

1. the type or characterization of employment, for example, was it a contract position or permanent full-time position?
2. the age of the employee at the time of the termination;
3. the length of service that the employee provided to the employer;
4. previous employment history and luring, if applicable;
5. the experience and skill set of the employee at the time of the termination and whether this experience and skill set is transferable to reasonable alternative employment;
6. the employee’s salary at the time of the termination;
7. the current job market and the availability of reasonable alternative employment;
8. whether the employee was in a position of management or upper management;
9. does the employee have a health concern or disability that may impair securing alternative employment?
10. the manner of the termination; and
11. is this a single termination or a mass lay-off of 50+ employees?

Although not set in stone, adjudicators tend to adopt a month per year of service approach to notice. Cases will typically end up in that range and, depending on the factors above, there may be additional months added or reduced.

Taking the above example, that employee could expect something in the range of 7 months notice. The difference is significant. Let’s say the set income allowed the employee a weekly notice value of $1,000 (net). The ESA minimum would be $7,000. Common law notice would be in the range of $28,000.

As always, every case may be different. This is not an exact science and this example is a very simple version of what might occur. It does, however, stress the importance of having a contract in place that sets out the parties’ rights and obligations on termination.

Bonuses

Dealing again in termination, one provision that employers often miss is the right to bonus payment during the reasonable notice period. If a contract properly states that the bonus will not be paid for the period of reasonable notice, then the employee will not get paid a bonus after the termination date. If the contract doesn’t mention it, then the yearly bonus is deemed to apply throughout the entire notice period.

This applies to both discretionary and non-discretionary bonuses; that being said, there is some wiggle room on the discretionary bonus. For instance, in Fraser v. Canerector Inc., the employer successfully argued that the employee’s performance in the year pre-dating the termination did not merit the discretionary bonus.

Where the employee bonus is not discretionary, it must be expressly stated in the contract that the bonus will not be paid during the reasonable notice period. The concept was discussed in Paquette v. TeraGo Networks Inc. . In that case, the Court set out a two-part test for determining whether an employee is entitled to compensatory damages for the loss of a bonus:

1. Was the bonus an integral part of the employee’s compensation package, thereby triggering a common law entitlement to damages in lieu of bonus?
2. If so, is there any language in the bonus plan that would restrict the employee’s common law entitlement to damages in lieu of a bonus over the reasonable notice period?

It was recently applied in Singer v. Nordstrong Equipment Ltd.. In that case, the employee knew that the employer’s practice was not to pay out bonus entitlement during the reasonable notice period. Despite his knowledge of this fact, he was still awarded a quantified bonus. The Ontario Court of Appeal emphasised that the company did not limit the bonus payment in writing within the employees’ contract and that it needed to do so in order to refute any common law right that employee had to his bonus entitlement.

The Takeaway: Contracts are good for both employers and employees alike. They set out the parameters of the employment relationship and, if worded properly, can act as a strong dispute resolution tool. Clarity in the employment relationship is a crucial component of any healthy work environment. Drafting appropriate contracts to each employee is the best thing an employer can do to reduce overall costs and the potential for litigation.

Do you need an Employment Lawyer? Speak to one of our professionals and get the help you need.

I own a small events and promotions business. Every so often I get emails from students asking if they could volunteer to learn about the business. I’ve never hired a student because they’re inexperienced but I’m considering hiring one as an intern this summer. I don’t have the budget for a full time employee but I would be willing to pay them a modest stipend. I’ve heard both paid and unpaid internships are illegal in Ontario. Is this true?

In Ontario, the rules around internships are strict and in recent years some employers have been required to change their internship programs as a result. If someone is receiving on the job training from a business they are considered to be an employee of the business under Ontario law. As an employee they are entitled to a minimum wage under the Employment Standards Act so paying them a stipend that does not meet the minimum wage is against the law.

There are two exceptions to this general rule which recognize the educational value of internships. The first is internship programs approved by a college or university which are permitted.

The second exception is internships that meet criteria set by the Ministry of Labour. These requirements include that the intern is receiving valuable training, is not taking someone else’s job, and has not been promised a job after their training. The most important feature is the educational component: the primary purpose of internships is to teach valuable skills, not to provide cheap labour to businesses.

The safest way to ensure compliance with the law is to have an internship approved as part of a college or university program. Alternatively, you should design the internship ahead of time to focus it around training and skills development.

Work at my business has slowed down quite a bit this year. I currently have 11 employees but there is not enough work to go around. I should be getting a set of new contracts that will keep everyone busy this spring, but I’d like to make some temporary layoffs in the meantime to avoid having to let anyone go for good. I’ve discussed this with business colleagues who told me that temporary layoffs are not permitted for non-unionized employees. What are my options?‍

The law applicable to temporary layoffs in Ontario can be confusing. The Employment Standards Act does allow temporary layoffs of up to 13 weeks in a 20 week period. In certain seasonal industries, such as construction, temporary layoffs over the winter months are fairly common. However, in other workplaces courts in Ontario have treated temporary layoffs as constructive dismissals and have ordered employers to provide termination and severance pay.

In recent years, some Ontario court decisions have allowed temporary layoffs provided employers comply with both the Employment Standards Act and the terms of the employee’s contract. Depending on the nature of the work, such layoffs may even be permitted when an employee is working with an unwritten contract. A temporary layoff is also more likely to be permitted if an employee remains entitled to benefits and can access Employment Insurance during their time off. During any such layoff it is important to inform the employee that the layoff is temporary and to provide them with a return to work date. Finally, a temporary layoff should not be used as a form of discipline to punish an employee for misconduct – that will most certainly result in a claim for constructive dismissal.