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Jul 6, 2021

Divisional Court Finds Statutory Severance Pay Calculation is Based on Employer’s Global Payroll

By Daria (Dasha) Peregoudova and Maria Gonzalez

 

On June 15, 2021, the Ontario Divisional Court released its decision in Hawkes v. Max Aicher (North America) Limited. The Court held that the payroll threshold for determining whether an employer is a severance payor under section 64 of the Employment Standards Act, 2000 (the “ESA”) is based on the employer’s global payroll, rather than just its Ontario or Canadian payroll.


Background

In addition to the ESA requirement for employers to provide notice or pay in lieu of notice on termination (of one week per year of service, up to eight weeks), section 64 of the ESA requires that employers pay severance pay of one week per year of service, up to a maximum of 26 weeks, to terminated employees with at least five years of service if the employer has an annual gross payroll of $2.5 million or more.

Previous case law has grappled with how the $2.5 million payroll threshold should be calculated, especially when the employer operates in multiple jurisdictions, either directly or through related companies. Early decisions dealing with this issue held that an employer’s operations outside Ontario were irrelevant to the calculation because payroll under section 64 was limited to an employer’s Ontario payroll. In 2014, however, the Ontario Superior Court expanded the definition of payroll under section 64 in Paquette c. Quadraspec Inc. and found that an employer’s payroll in both Ontario and Quebec could be considered in the threshold calculation. Although Paquette appeared to have clarified the law in relation to the calculation of payroll under section 64, the same issue resurfaced once again in Hawkes.


Hawkes v. Aicher

The Plaintiff, Doug Hawkes, was employed by Max Aicher (“Aicher”), a steel company operating in Ontario and a wholly owned subsidiary of a German corporation, for 38 years before being terminated. At the time of his termination, Aicher’s payroll in Ontario was less than $2.5 million. However, the global payroll of the German parent company exceeded $2.5 million. Based on this, Mr. Hawkes filed a complaint with the Ministry of Labour alleging that he was entitled to termination, vacation and severance pay under the ESA. An Employment Standards Officer (“ESO”) determined that Mr. Hawkes was entitled to termination and vacation pay, but not severance pay because Aicher’s Ontario payroll was less than $2.5 million.

On appeal, the Ontario Labour Relations Board (the “Board”) upheld the ESO’s decision and found that “payroll” for the purposes of section 64 was limited to an employer’s Ontario payroll.


The Divisional Court Decision

On judicial review, the Divisional Court set aside the Board’s findings and clarified that the calculation must include an employer’s payroll outside Ontario and outside Canada, for four primary reasons:

  1. If the legislature had intended to restrict an employer’s payroll under section 64 to Ontario payroll, it would have explicitly done so.

  2. Contrary to the Board’s assertion, Paquette did in fact consider the interaction between section 3(1) and section 64 of the ESA. Specifically, the Court noted that section 3(1) limits the Board’s awards for statutory severance pay to Ontario employees, but has no impact on how the severance is to be calculated.

  3. There is a strong reason to depart from pre-Paquette decisions, which were a “house of cards, built on a flimsy foundation” lacking sufficient support for the position that only Ontario payroll is to be considered when calculating the threshold amount under section 64.

  4. Consistent with prior Supreme Court of Canada guidance, the ESA is a benefit-conferring legislation and must be interpreted in a broad and generous manner, and any doubts arising from difficulties of language should be resolved in favour of claimants.


Implications for Employers

The Hawkes decision should settle the matter once and for all. Ontario employers have become accustomed to assessing employee entitlement to severance pay under the ESA based on their “Ontario-based” payroll. That will now change and employers will have to consider their global payroll when determining whether they owe severance pay to terminated employees and, if so, how much. This may particularly impact multinational employers.

While this does not change any common law assessment of reasonable notice on termination, employers who have enforceable employment agreements limiting entitlement on a without cause termination under the ESA, must now ensure that the proper calculation and payment is made. Failure to pay the full amount, even if inadvertent, could lead to allegations of failure to comply with the ESA and possibly, bad faith for doing so.

We will continue to monitor developments on this issue, including any appeals that may be initiated. If you have any questions, please contact a member of our Workplace Law Group.

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