Ontario Court Rules Severance Pay Is Based on Global Payroll

​Ontario's Divisional Court—a branch of the Superior Court of Justice in Canada's largest province—unanimously ruled in June that more employers in Ontario will now have to take their global payroll into account in determining an employee's entitlement to severance pay.

According to the Ontario Employment Standards Act 2000 (ESA), employers in the province with a payroll of more than $2.5 million must compensate an employee for the loss of a job with five or more years of service to the company upon termination, explained Hilary Page, a lawyer with SpringLaw in Toronto.

In the Hawkes v. Max Aicher (North America) Ltd. case, the Divisional Court overturned an earlier Ontario Labor Relations Board decision that the Can$2.5 million (approximately 1.98 million USD) threshold was limited to an employer's Ontario payroll.

"Prior to the Hawkes decision, employers could take the position that the payroll criteria only applied to payroll within the province of Ontario," said Darren Avery, an attorney with Filion Wakely Thorup Angeletti LLP in London, Ontario. "This meant an employer could avoid paying severance pay if they only had a small operation in Ontario—and thus a payroll of less than $2.5 million."

The Hawkes decision changed that stance, Avery continued. "The court gave a clear signal it will consider an employer's global payroll—whether it be from a different province or even a different country—in determining whether the statutory $2.5 million threshold is met."

Under the ESA, a notice of termination caps out at eight weeks, while severance pay can be issued up to 26 weeks, Page said.

"Most employees are entitled to more than the amounts in the Employment Standards Act," said Stephen Wolpert, an attorney with Whitten & Lublin in Toronto.

Employers now need to reconsider their obligations when firing employees, Wolpert stated. The court decision will also increase termination and severance costs for many employers in Ontario.

"As a result, some larger companies who had small operations and small payrolls in Ontario may have previously thought they were exempt from paying statutory severance pay," Wolpert added. "Now it is clear that they will not be exempt."

Case Background

The plaintiff worked for a Hamilton, Ontario-based subsidiary of European steel company Max Aicher until 2015 when his employment was terminated without cause.

Fired employees have long been entitled to various protections under Ontario's ESA, Wolpert stated.

The plaintiff then filed a complaint with Ontario's Ministry of Labor, claiming he was entitled to termination pay, vacation pay and severance pay based on Max Aicher's global payroll. The Germany-based manufacturer's global payroll far exceeds $2.5 million, Page noted. 

Initially, an employment standards officer reviewed the claim in 2017, granting the employee termination and vacation pay. The officer also determined the plaintiff was not entitled to severance pay because his former employer did not have a payroll of at least $2.5 million in Ontario.

The Ontario Labor Relations Board agreed with the employment standards officer's decision in 2018, reiterating that payroll for the purposes of severance pay under the ESA was limited to an employer's Ontario payroll. The plaintiff then appealed this decision.

"The road to this decision was long," Page said. "The decision we have now is from the judicial review of the Labor Relations Board decision by the Ontario Divisional Court."

Takeaways for Canadian Employers

All employers in Ontario need to know the financial impact the decision may have on their operations in the event they part ways with workers based in the province, Avery explained.

"In light of this development, employers should be aware if they have a payroll of $2.5 million or more—even if that payroll is spread across the globe—they will be on the hook to provide statutory severance pay to employees in Ontario," he added. "Businesses are encouraged to consider their company's global payroll when assessing their termination obligations under Ontario's employment standards legislation."

Businesses should also be cognizant that employees entitled to severance pay do not need to have accrued five consecutive years of service with their employer, Avery noted.

"Under Ontario's statutory regime, if an employee leaves their employment—whether voluntarily or involuntarily—for a number of years, and then returns to the employment of that same employer at a later date, a break in service will not absolve the employer of its severance pay obligations where the employee's cumulative years of service amount to five years or more," Avery added.

The Hawkes decision has far-reaching implications, particularly for multinational employers with some employees in Ontario, said Andrew Shaw, an attorney with Baker McKenzie in Toronto.

"Employers can continue to take an aggressive position and argue only Ontario payroll is relevant for assessing statutory severance pay obligations," Shaw concluded. "If this decision stands, there is nothing a global company can do to avoid paying statutory severance even if it has a small number of employees in Ontario."

Catherine Skrzypinski is a freelance writer based in Vancouver, British Columbia, Canada.