September 25, 2012 Articles

Tales from the Great White North: Terminations in Canada

"At will" employment is unheard of above the 49th parallel.

By Karen M. Sargeant – September 25, 2012

I have often had American employers ask me if I know what I’m talking about. And that question always comes when they are asking if they can terminate an employee’s employment. The first shock comes when I explain that there is simply no concept of “at will” in Canada. The second shock comes when I explain how high the cause threshold is. The next shock comes when I explain that without cause, an employee is entitled to reasonable notice or pay in lieu of reasonable notice, the same notice that an employee who was affected by a downsizing would be entitled to. And the last and biggest shock comes when I explain just how much that notice or pay in lieu of notice can be.

The following explains just how complicated, and expensive, the termination landscape in Canada can be.

Cause for Termination? 
The first issue to be decided is whether there is cause to terminate an employee’s employment. Employees terminated for cause are entitled to no notice, pay in lieu of notice, or severance pay.

The term “just cause” has been defined in a number of court decisions. The British Columbia Supreme Court in Leung v. Doppler Industries Inc., [1995] 10 C.C.E.L. (2d) 147, for example, defined “just cause” as:

[C]onduct on the part of the employee incompatible with his or her duties; conduct which goes to the root of the contract with the result that the employment relationship is too fractured to expect the employer to provide a second chance.

Quoting from an earlier case (Chalk v. Women’s Emergency Centre (Woodstock) Inc., [1989] O.J. No.21), the Ontario Superior Court of Justice in O’Dwyer v. Dominion Soil Investigation Inc., offered the following test:

[A]bsent a flagrant dereliction of duty, it must be shown that something was done clearly inconsistent with the proper discharge of the employee’s duties that reasonably indicates a risk of injury to the employer’s interest through continued employment.

Clear examples of just cause include dishonesty, most notably theft, serious misconduct, incompetence, or conduct incompatible with the employee’s duties or prejudicial to the employer’s business. The concept of just cause is, however, very much fact-driven. As was stated by the Saskatchewan Court of Queen’s Bench in Smith v. General Recorders Ltd., [1994] 121 Sask. R. 296:

There is no compendium of employment misdemeanours which alone or in combination will justify the summary dismissal of an employee. Each case stands to be decided according to its own facts. Clearly though, it is not enough that an employer is displeased by the employee’s performance. There must be some serious misconduct or substantial incompetence.

Thus, “cause” will be assessed in the context of the particular workplace and, in some circumstances, the courts have held that a warning is a precondition to summary dismissal. Further, past conduct and conduct discovered subsequent to the dismissal may be considered. In all instances, employer condonation of the alleged “cause”—e.g., by failing to act in a timely fashion—may deprive the employer of its entitlement to dismiss for cause.

From a practical standpoint, an employer asserting just cause bears a heavy onus. As it represents an all-or-nothing proposition, i.e., the employee may be summarily dismissed without notice or payment in lieu if cause is established, courts are generally reluctant to find that just cause exists except in the clearest cases. Employers must recognize that cause is extremely difficult to establish unless there is a fundamental element of dishonesty or serious misconduct.

Having said that, incompetence represents a special case of cause and is dealt with somewhat differently by the courts. In that respect, Canadian courts have said on numerous occasions that to establish just cause on the basis of incompetence, the employer must first establish that:

  • An objective standard of work that the employer desires or requires was set;
  • this standard was communicated to the employee;
  • the employer provided suitable instruction to the employee if the employee did not initially hold himself or herself out to be able to perform the job to the standard set by the employer;
  • the employee was capable, but chose not to meet the standard; and
  • there had been a warning to the employee that failure to meet the standard would result in dismissal (incidental to such a warning, some cases have held that the employer must provide practical guidance on improvement of work methods or results).

Notice, Pay in Lieu of Notice, and Severance Pay

In each Canadian province, an employer is obligated under employment or labor standards legislation to provide an employee whose employment is being terminated without cause with notice, or pay in lieu of notice. While each province is slightly different, those notice periods range in the one- to eight-week range. For example, in Ontario, Canada’s most populous province, those periods are as follows:

Notice/Pay in Lieu of Notice

3 months to less than 1 year – 1 week
1 year to less than 3 years – 2 weeks
3 years to less than 4 years – 3 weeks
4 years to less than 5 years – 4 weeks
5 years to less than 6 years – 5 weeks
6 years to less than 7 years – 6 weeks
7 years to less than 8 years – 7 weeks
8 or more years – 8 weeks

Where the employment of large numbers of employees is being terminated—e.g. 50, or more in any period of four weeks or fewer—employers must provide additional notice or pay in lieu of notice.

In Ontario and for federally regulated employers (such as the banks or airlines), employers must also provide severance pay. For example, in Ontario, employers with an annual Ontario payroll of $2.5 million or more are obligated to give severance pay to employees with five or more years of service. Employees are entitled to one week per completed year of service to a maximum of 26 weeks, calculated to the nearest month (e.g., 6 years and 7 months of  service = 6 7/12 weeks of severance pay).

In addition, in Quebec and the federal sectors, certain employees are protected from termination of employment, unless just cause or a good reason, such as restructuring, exist. Fortunately, the majority of Canadian provinces do not have such restrictions. But unfortunately, the statutory amounts set out above do not end the story in any Canadian jurisdiction.

Reasonable Notice or Pay in Lieu of Reasonable Notice 
In addition to notice, pay in lieu of notice, and severance pay under employment or labor standards legislation, employees terminated without cause are entitled to reasonable notice or pay in lieu of reasonable notice under the common law or, in Quebec, the Civil Code. Unless the parties have expressly contemplated a termination date for the contract of employment, i.e., set a fixed term of employment, the employer must provide the employee with notice of termination or payment in lieu of such notice, absent just cause for the termination.

The length of the notice period may be set by mutual agreement as a term of the contract of employment, although it must accord, at least, with the minimum employment or labor standards legislation in the jurisdiction. If there is no agreed period of notice, a period of “reasonable notice” will be inferred by the courts. In fact, in Canada, the term “wrongful dismissal” often refers not to the termination of the employment itself, which is permissible unless it contravenes human rights, employment standards, or other specific legislation, but to the failure to provide adequate notice or payment in lieu of notice to the dismissed employee.

The period of reasonable notice is designed to provide the employee with the opportunity to find reasonable alternative employment. In the absence of an express agreement as to notice between an employer and employee, the reasonable notice to which an employee is entitled is determined by a number of factors, including:

  • character of the employment;
  • length of service;
  • age of the employee;
  • the employee’s compensation; and
  • the employee’s prospects of obtaining similar employment.

While all employment and labor standards statutes in Canada provide for minimum notice periods in the absence of just cause, these are minimum requirements only. Reasonable notice periods at common law or pursuant to Quebec’s Civil Code are usually significantly greater than these minimum statutory requirements.

The determination of what constitutes reasonable notice is made on a case-by-case basis. There are no “rules of thumb” or formulas, although many courts have been known to award one month or more per year of service. Decisions in similar cases by common-law courts are most frequently used as precedents in arriving at a determination. The generally accepted “rough upper limit” on notice periods in most provinces is 24 months. In these provinces, this is usually reserved for senior executives, in their late 50s or early 60s, with very lengthy service. This upper limit varies somewhat in other provinces.

Mitigation
There is a duty on all dismissed employees to take reasonable steps to seek alternative employment, unless an employment contract contains an express provision to the contrary. Failure to do so will result in a reduction of damages awarded.

The duty to mitigate may include an obligation to move or change the character of employment. It is important to realize, however, that the dismissed employee is not under an obligation to accept a substantially different job or a job that pays significantly less. While the dismissed employee has a duty to mitigate, the employer has the onus in a wrongful-dismissal court action to show that the employee has failed to take reasonable steps to mitigate.

Constructive Dismissal
Employees are entitled to treat themselves as having been “constructively dismissed” when their responsibilities and duties have been altered so significantly that the employer can be said to have repudiated the employment contract. When an employee is constructively dismissed, the law considers the situation to be like any other dismissal requiring reasonable notice.

Situations where a constructive dismissal has been found include:

  • reduction in responsibilities and duties;
  • unilateral decrease in salary;
  • changes in hours or shifts;
  • placing an employee on probation;
  • unreasonably postponing an employee’s start date; and
  • unilateral requirement regarding mandatory retirement.

As a result, transfers of employees, changes to compensation plans, and modifications to employee duties must all be considered very carefully before implementation. Providing reasonable notice to employees of anticipated changes to the terms and conditions of their employment will alleviate many concerns in this area.

Conclusion
Navigating the termination landscape in Canada can be a minefield. Entitlements vary by province. Cause is difficult to achieve. Employment and labor standards only provide for minimum entitlements. There are no formulas for determining what is reasonable notice. And those periods of reasonable notice can be very high, as much or more than one month per year of service. Termination provisions in employment agreements are therefore very important and something we recommend you suggest to your clients. Just be sure that they do not include any reference to employment “at will,” a concept that simply does not exist in any Canadian jurisdiction.


Keywords: litigation, employment and labor relations law, at will, just cause


Karen M. Sargeant is a partner with Fasken Martineau DuMoulin in the firm's Toronto, Ontario, office.


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