What Small Business Owners Need to Know - Severance Costs Can be Expensive

When I meet with my clients to review their financial statements, I typically have an agenda of various topics I wish to discuss with them. One topic I like to review is their staffing situation. We typically analyze "accountant numbers" such as staffing costs as a percentage of sales, but I also like to review other employment related issues such as whether the client has updated employment contracts and have they entered into consulting contracts (employee vs independent contractor issues).

Once on this topic, clients often want to discuss their severance cost obligations with respect to (a) dismissing an employee (b) downsizing if their business fell off and (c) obligations should they sell the business? Since those issues are way beyond my skill-set, I refer them to their employment lawyer.

Since I thought you may wish to know the answers to these questions, I asked Stephen Shore of the firm Sherrard Kuzz LLP, an employment and labour law firm, if he could provide his expertise on the severance issue.

Stephen kindly agreed to write a blog post on The Top 5 Severance Issues for Business Owners in Ontario. Before I turn it over to Stephen, please note that; employment law can vary significantly from province to province and the below commentary is limited to Ontario. The commentary is also general in nature. You should seek employment law counsel in your own province that addresses your specific situation. With all these caveats out of the way, let's get to Stephen's post.

The Top 5 Severance Issues for Business Owners in Ontario
By Stephen Shore, Sherrard Kuzz LLP, Employment & Labour Lawyers

The following are in my professional opinion the top 5 severance issues for business owners in Ontario.

1. Obligations on Termination – How much will I owe?

The “cost” of terminating an employee will depend on many factors, including the following:

1. Is there a valid employment agreement?
2. How long has the employee been with the company?
3. How old is the employee?
4. How much did s/he make?

A business owner who has not pro-actively considered the cost of termination is often surprised by the size of the “bill”. On the other hand, those who plan ahead achieve two extremely valuable objectives: (1) lower cost and (2) cost-certainty.

The easiest and most straight-forward way to achieve these objectives is through the use of a written employment agreement which defines the terms and conditions of employment, including what happens on termination. Properly drafted and executed, an employment agreement can limit an employee’s entitlement upon termination to the minimum amount set out in the employment standards act (roughly one week per year of service). Without an employment agreement, that amount can be upwards of one month per year of service, and even higher. That can amount to a very big financial difference, particularly if the employee has been with the company for many years.

An employment agreement may also be used to secure other significant protections such as non-solicitation and confidentiality obligations.

A business that operates without written employment agreements leave itself vulnerable to the will of the employee-friendly courts. This is not a desirable place to end up.

The most prudent approach is to have all employment contracts prepared by experienced employment counsel, and reviewed periodically, to ensure the language used is and continues to be enforceable. Employment contracts should not be attempted without professional assistance.

2. Employment Standards Act Requirements – Do I owe statutory severance pay?

The Employment Standards Act (“ESA”) sets the minimum (floor) for what an employee is owed upon the termination of employment.

There are two (2) categories of potential payment under the ESA: “termination pay” and “severance pay”. Though the general public tends to use these terms interchangeably, “termination pay” and “severance pay” are not the same.

Under the ESA, an employee is entitled to advanced “notice” of termination, which notice can be given in the form of “working notice”, “pay in lieu of notice” (“termination pay”) or a combination of both.

“Severance pay” is owed to an employee regardless whether the employee is entitled to “termination pay”, but is only owed to an employee who has greater than five (5) years of service and whose employment is terminated by an employer with a payroll greater than $2.5 million dollars.

In calculating whether the 2.5 million dollar payroll threshold is met, an employer must look at: (i) the aggregate wages of employees in the fiscal year prior to the severance, and (ii) the product of the total wages of employees during the four (4) weeks prior to the termination multiplied by 13. If either amount exceeds 2.5 million the threshold is surpassed and the employee is entitled to “severance pay” in addition to whatever “notice” to which the employee is entitled.

3. Temporary Lay-off vs Termination – Am I permitted to lay-off an employee for a period of time?

Many business owners are surprised to learn that – at law – an employer does not have the right to “lay-off” an employee for any time period, regardless whether there is a good reason or however short the period of time. The act of “laying off” can be treated by the employee as the termination of his or her employment and a wrongful dismissal suit may follow.

That being said – the “right” to lay-off an employee can be introduced into an employment relationship through an employment contract or practice. That is to say, an employer and employee can agree in a written employment agreement (or, in the case of a unionized workplace, a collective agreement) that an employee can be laid-off without triggering a termination. Alternatively, if the employee has experienced lay-off on several previous occasions without complaint, then it may be implied that, through practice, the right to do so has been introduced into the relationship.

It is important to note that even where the right to “lay-off” has been introduced into the employment relationship, the “lay-off” must comply with the provisions of the ESA which sets limits on the length of time a temporary lay-off may last and requires certain employee entitlements to continue during a period of layoff (i.e., group benefits). Once again, a lay-off provision should not be attempted without professional assistance.

4. Mass Termination – Are there special rules for a major restructuring event?

Yes – there are special rules which apply when fifty (50) or more employees are being terminated in a four (4) week period.

These special rules are subject to exceptions and qualifications, and legal advice should be sought in every case of a potential mass-termination. That said, the ordinary consequence of a mass-termination is an increased advance-notice requirement or, failing that, an increased liability for ESA “termination pay”. The amounts are as follows:

1.  For 50 – 199 terminated employees: At least 8 weeks’ notice
2.  For 200 – 499 terminated employees: At least 12 weeks’ notice
3. For 500 or more terminated employee: At least 16 weeks’ notice

In addition to the increased notice / “termination pay” requirements, an employer who carries out a mass-termination has reporting and posting requirements imposed by the Ministry of Labour (Ontario) which, if ignored, can have enormous financial impacts.

A mass-termination event is a very sensitive event which imports significant regulatory obligations. An employer is well advised to seek expert assistance well in advance of a potential occurrence.

5. Termination Meeting – How do I tell someone their employment is being terminated?

In carrying out a termination meeting, an employer is expected to be respectful, fair and compassionate. The failure to do so could result in significant damages.

This does not mean an employee is entitled to an explanation, justification or discussion concerning the merits of the decision to terminate. Rather, it requires an employer avoid being harsh and insensitive by, for example, publicly humiliating the employee or terminating the employee on his/her birthday or holiday.

The communication in the meeting should be direct and firm. The employee should be provided with an original signed copy of the termination letter.

Other best practises would be to have a second company representative present to take notes. The meeting should be held towards the end of the working day (if possible) or at a time when the employee would be able to leave without encountering his or her colleagues. Following the meeting, the employee should be permitted to retrieve personal belongings and security should be on-hand and utilized only if required. It is sometimes appropriate to offer the employee transportation home (i.e., taxi).

Once the termination meeting is complete, access to email and electronic records should be discontinued and a communication should be sent to other employees advising that the employee is no longer with the company.

Additional considerations may apply where the termination is for cause, where an offer of settlement is being made or where other factors are involved (e.g., unionized environments, mass-terminations, etc.). Professional advice is always recommended to ensure all legal and technical aspects of the termination are covered.

Stephen Shore is an experienced employment and labour lawyer, representing employers. Stephen regularly writes for a variety of employment and labour law publications and speaks on his areas of expertise. Please feel free to contact him directly at 416.603.6264 or by e-mail at sshore@sherrardkuzz.com. Sherrard Kuzz LLP is one of Canada’s leading employment and labour law firms exclusively representing the interests of management. Recognized nationally and internationally, this team is consistently named among Canada’s Top 10 Employment and Labour Boutiques (Canadian Lawyer®), Canada’s Leading Employment & Labour Law Firms (Chambers Global®) and as Repeatedly Recommended (Lexpert®).

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. 

Small Business Owners - Get on my Mailing List

If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com.

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. Now that tax season is over, I will start the mailings shortly.

Thanks to the many readers who have already signed up.

Mitigation – Unraveling the Puzzle

Today, in the conclusion of her two part guest post on the dismissed employee's obligation to mitigate damages, Marie-Hélène Mayer discusses the issue in more conventional dismissal situations. I thank Marie-Hélène for her excellent posts.
 

Mitigation - Unraveling the Puzzle

By Marie-Hélène Mayer

In my blog post on Monday, I discussed the recent decision made by the Ontario Court of Appeal in the case of Chevalier v. Active Tire & Auto Centre Inc. The outcome of this decision confirms a general principle of employment law: when one party breaches a contract, the other party is obliged to take all reasonable steps to minimize – that is, to “mitigate” their losses. In some cases, mitigation means a terminated employee may need to accept an offer of re-employment from their previous employer. Although not a common situation, it is happening more frequently and marks an important legal development. Today, I examine a more typical mitigation scenario: when an employee is terminated, provided with a severance package, but is not offered a position back with their previous employer.

When discussing the concept of mitigation it is important to go back to first principles of contract law. Mitigation is a principle of the law of damages for breach of contract. As employment law is in essence contract law, the concept of mitigation has figured prominently in employment law cases. As noted above, a dismissed employee must take all reasonable steps to minimize any losses they have suffered as result of the loss of their employment. In non-legal jargon this means that if you have lost your job, you have an obligation to find another job as quickly as possible to cut your losses.  

What is sometimes unclear to both employees and employer (and where most of the questions arise from both parties) is whether an employer must continue to pay an employee during their notice period, once that employee has secured new employment. An example is useful to clarify.    

Lisa is terminated November 1, 2013, and is provided with six months of notice. Lisa’s termination agreement does not address what happens if she gets another job before the six months are up. Lisa gets a new job on January 30, 2014. Is Lisa still entitled to receive the remaining months of salary and benefits? The technical legal answer (and the one you would encounter in a contract textbook) is that the employer is no longer obliged to continue to pay Lisa once she ceases to suffer an interruption in her earnings.  

The practical answer is, not surprisingly, rarely this straightforward. Usually a compromise is reached and a “mitigation clause” is inserted into the termination agreement. This legal term usually states that should the employee secure a new position before the end of the notice period, the employer will pay a portion of what is remaining – usually half. (This too can be negotiated). It is important to remember the general principle: an employee has a positive obligation to look for another job. This obligation can be modified by agreement, but the general presumption, absent agreement to the contrary, is that the employee must take reasonable steps to secure replacement income if their employment is terminated. 

In my experience, employees sometimes have unrealistic expectations and do not fully appreciate what steps they are obliged to take to look for a new position. There is a balance which needs to be achieved between the competing interests of employees and employers. Employees want the largest package possible and employers are looking for ways to minimize costs. 

Employers need to understand that in order for the doctrine of mitigation to apply – the employee must take reasonable steps to find a comparable position within the prescribed notice period. It is not reasonable to expect a former employee to simply take the first offer that comes along – especially if that offer is for considerably less money. Some lawyers will argue that an employee must accept any alternate employment. I disagree. The accepted thinking is that an employee is obliged to accept only a comparable position. This is sometimes tough for employers to accept.  

A final point for employers to consider is that no matter how well an employee may have mitigated their damages, employers must still meet their statutory obligations of notice and/or severance under applicable legislation. Payment under the applicable statutory requirements is not set off by mitigation earnings.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

Marie- Hélène Mayer B.A. (Hons.), LL.B/J.D. is an employment lawyer with Rubin Thomlinson LLP. Marie-Hélène has spent most of her career in private practice appearing before various administrative tribunals and courts. Her primary focus is advising employers and employees on workplace issues under both Ontario and Federal law, termination settlements, employment contracts, wrongful dismissal litigation and human rights complaints. Marie-Hélène has also worked for a large financial institution, where she acquired corporate human resources experience. Having worked in both private practice and in the corporate world means that Marie-Hélène can skillfully apply and interpret employment law in today’s business workplace. Marie-Hélène may be reached at mmayer@rubinthomlinson.com. Marie- Hélène’s own blog can be found at Club Mom. 

Employment Mitigation Issues - Does a Dismissed Employee Have to Return to Their Old Job if it is Offered Back?

As I have enough trouble writing about income tax and money, I have steered away from discussing employment issues on my blog, other than a rant about references and how they are A No Win Situation for Past and Future Employers and how people Waste References.

As most of us will be dismissed, fired or laid off at some point in our careers, I thought it would be interesting to have a series of posts on the mitigation of damages from both the employee and

employer's perspective. 

Since this topic is complex, I have enlisted the help of Marie-Hélène Mayer, an employment law specialist whom I have worked with over the years. In the first post of her two-part series, I think you will be shocked at how a recent court case expects employees to mitigate their damages in certain circumstances.

 

Termination and Return to Work: Ontario Court of Appeals Weighs in on Mitigation

By Marie-Hélène Mayer

One of the most frequent questions I get asked when providing advice to a newly terminated employee is how quickly he or she should be looking for a job. Employers are equally concerned with how quickly a terminated employee should be seeking replacement employment since they bear the entire financial burden of paying severance. Both employees and employers are often surprised to hear that an employee’s obligation to secure replacement employment (or as lawyers like to call it, “mitigate” their damages) is quite stringent and requires employees not only to take active steps to look for a new position, but may, in some instances, require the employee to consider going back to work for their former employer. This may sound counter-intuitive and impractical (it can be) but is happening with greater frequency.

Today, in the first part of a two-part series on mitigation, I discuss a recent decision of the Ontario Court of Appeal, Chevalier v. Active Tire & Auto Centre Inc. (“Chevalier”) 2013 ONCA 548, which confirms the principle that the law of mitigation, may in certain circumstances, require a terminated employee to accept an offer of re-employment from its previous employer. On Wednesday, in the second part of this series, I will examine an employee’s obligation to mitigate in the more conventional situation, where the employee is dismissed and not offered their job back.

In Chevalier, the employee had been the manager of an auto and tire centre. He was 55 years old and had worked there for 33 years. The employer was having financial troubles. The employer thought (erroneously) that he was entitled to lay the employee off on that basis without providing adequate notice. The employee took legal action. Five days after litigation began, the employer recalled the employee to work.

The employee declined to return to work and instead proceeded to trial. The employee made several allegations against his employer. He claimed that he was not prepared to return to his job because it would be too embarrassing and humiliating. The employee also claimed that his employer had embarked on a deliberate campaign of harassment and intimidation which made returning to work impossible. But the evidence simply did not support his claims. The Court found no basis to conclude that the employer had been motivated by anything other than legitimate business reasons when it decided to lay off this employee. In short, the employer had not engaged in poor conduct or any “campaign of harassment”. In the end, the Court found that a reasonable person in the same position would have accepted the offer to return to the workplace. Since the employee should have returned to work when requested, but refused, no damages were awarded.

What does this mean as a practical matter? If you lose your job, and later your employer changes its mind and offers you your job back, are you obliged to take it? If you are an employer, are you under an obligation to re-employ a terminated employee? Are there limits on how and when it should be done?

Here are a few things to think about if you are an employee faced with this situation. The legal landscape has changed. Judges are unlikely to be impressed by the fact that you may find it uncomfortable to return to work after being let go. This is particularly true if your employer has been experiencing financial difficulties. Getting a new job is difficult, and when an employer makes a legitimate offer to rehire an employee, unless you have something better waiting for you, most employees would be foolish to not accept the offer and demand a notice payment instead. The Courts are unlikely to side with the employee unless there is evidence that the employer’s offer is insincere or that the relationship between the employer and the employee is completely irreparable. Similarly, a court would not expect an employee to accept a job offer from their former employer if there is evidence that the employee was humiliated or embarrassed prior to being let go.

If you are an employer, your intentions must be sincere and should look that way too. Optics are very important. Employers who can show that they have behaved appropriately and that the work environment is respectful may save themselves significant severance dollars. Employers must act at all times as though a record is being created (and make sure that they do create a documentary record) and conduct themselves appropriately. Employers who do so can limit their liability and a potential wrongful dismissal suit down the road.

Join me again on Wednesday, I will discuss mitigation in context of more traditional dismissal cases.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.
 

Marie- Hélène Mayer B.A. (Hons.), LL.B/J.D. is an employment lawyer with Rubin Thomlinson LLP. Marie-Hélène has spent most of her career in private practice appearing before various administrative tribunals and courts. Her primary focus is advising employers and employees on workplace issues under both Ontario and Federal law, termination settlements, employment contracts, wrongful dismissal litigation and human rights complaints. Marie-Hélène has also worked for a large financial institution, where she acquired corporate human resources experience. Having worked in both private practice and in the corporate world means that Marie-Hélène can skillfully apply and interpret employment law in today’s business workplace. Marie-Hélène may be reached at mmayer@rubinthomlinson.com. Marie- Hélène’s own blog can be found at Club Mom.