The end of an employment relationship can be a complex and challenging time for both employers and employees. Termination compensation is a critical aspect of this process, and it can be difficult to navigate the various Ontario legal requirements and standards involved. As an employer or business owner, it is essential to understand the nuances of termination compensation to minimize disputes and ensure fair treatment of all parties involved.

The essence of termination compensation

When an employer terminates an employee without cause, employees and dependent contractors are entitled to minimum statutory termination compensation. It’s important to note that employees may choose to seek more than the minimum amounts by launching a wrongful dismissal claim in court, as long as they have not already filed a complaint with the Ontario Ministry of Labour that was not withdrawn before an order was issued.

The role of employment contracts

Employment contracts play a pivotal role in determining termination compensation. They can limit an employer’s liability to the minimum standards of the Employment Standards Act, 2000, provided that a court does not find the contract terms to be unconscionable, and the language is clear enough to rebut the presumption of common law reasonable notice of dismissal. In cases of involuntary resignation, dismissal for cause, or dismissal not for cause, employment standards officers or courts often need to step in to resolve disputes about termination pay, severance pay, or pay in lieu of notice.

The importance of global compensation

Termination compensation is typically calculated based on the global compensation of the employee, which includes ordinary or base pay, commissions, health care benefits, life insurance, car allowance, bonus, share options, and pension, if applicable.

Special considerations for probationary employees

Employees who have worked for less than three months (probationary employees) are generally not owed termination compensation unless stated otherwise in an employment contract. However, if the employee can prove that termination was motivated by discrimination, courts and the Ontario Human Rights Tribunal will award termination compensation, including lost income, provided the employee can prove mitigation (reasonable job search without success).

Additional circumstances

The Employment Standards Act, 2000 outlines additional circumstances in which an employer may be relieved from paying termination pay or severance pay. To reduce the likelihood of disputes and liability for not-for-cause terminations, it’s wise to record a precise formula for termination compensation in the employment contract and exclude common law damages.

Complying with minimum requirements

The formula for termination compensation must meet the minimum requirements for notice of termination or termination pay and severance pay, where applicable, under the Employment Standards Act, 2000. In fixed-term contracts, it’s essential to address the possibility of early termination with a specific amount or formula to avoid liability for the total contract term.

Determining notice or termination pay

The minimum amount of notice or termination pay in lieu of notice mandated by the Employment Standards Act, 2000 is based strictly on the employee’s number of years of service. In contrast, courts consider factors such as length of service, age, education, position, experience, and skills when determining reasonable notice of termination in wrongful dismissal lawsuits.

Working notice and severance pay

When terminating an employee not for cause, employers may choose to give working notice, termination pay in lieu of notice, or a combination of both. Courts may deem working notice unenforceable if the employee can prove a poisoned work environment or embarrassment in the circumstances of fulfilling the working notice. It’s important to note that while an employer may choose to give working notice of termination, actual payment of severance pay, where applicable, is mandatory under the Employment Standards Act, 2000.

Statutory severance pay

Statutory severance pay under the Employment Standards Act, 2000 is based on the employee’s length of service, the amount of the employer’s payroll, and specific circumstances related to the total number of employees being dismissed. The threshold for payment of severance pay is employee service of five years or more and an employer’s payroll of $2.5 million or more a year. In Ontario, if these conditions are met, an employee who is terminated not for cause is entitled to one week of pay for every year of service, up to a maximum of twenty-six weeks. Special rules apply to mass terminations, such as plant closures. If a permanent discontinuance of all or part of an employer’s business occurs, and fifty or more employees are terminated within a six-month period, severance pay will be applicable regardless of the business’s annual payroll.

Constructive dismissal and altering employment agreements

Significantly altering the terms or conditions of an employment agreement without the employee’s consent or without providing a benefit to the employee is unenforceable and may give rise to a claim of constructive dismissal. As an employer or business owner, it is crucial to exercise caution when considering changes to employment agreements and ensure that all parties are in agreement.

Fiduciary obligations and termination for cause

Certain employees may be deemed fiduciaries to their employers, which involves a higher level of fidelity and accountability. As an employer or business owner, it’s important to understand that fiduciary employees are expected to avoid conflicts of interest, act in the best interests of the employer, and refrain from profiting as a result of their position. It is crucial to note that, without disclosure and consent, a fiduciary cannot compete with their employer during the course of their employment. After employment ends, the fiduciary employee generally cannot directly solicit the employer’s customers for a reasonable period.

However, if the employer acts wrongfully in terminating the employment of a fiduciary employee, the fiduciary obligations of that employee cease. It is important for employers and employees to understand the responsibilities associated with fiduciary relationships and the implications these obligations may have in the context of termination.

Final thoughts

Navigating the complexities of termination compensation requires a solid understanding of the Employment Standards Act, 2000, common law principles, and the specific terms of employment contracts. As an employer or business owner, by being aware of the various factors that can influence termination compensation, you can work together with employees to minimize disputes and ensure a fair resolution to the end of an employment relationship. While this article aims to provide a comprehensive overview, it is always advisable to consult with an employment lawyer to address any specific concerns or questions that may arise.