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Common Law Severance Pay in Ontario

Severance pay is a significant topic in employment law, ensuring that employees receive fair compensation when their employment is terminated without cause. In Canada, the idea of severance pay is addressed both by statutory requirements, such as those found in the Employment Standards Act (ESA), and by common law principles. Common law refers to judge made law, which comes into force as judges make decisions in legal cases.

While statutory severance outlines a minimum amount of compensation based on a predetermined formula, common law severance is often more generous and takes a broader range of factors into account. This approach reflects the unique circumstances of each employee, aiming to provide a more equitable outcome. Common law severance considers factors such as the length of service, the employee’s age, their position within the company, and the availability of similar employment in the job market. By doing so, it ensures that the compensation is tailored to the specific challenges an employee might face in finding new, comparable work.

What is Severance Pay at Common Law?

When we talk about severance pay in terms of common law, this typically refers to the compensation that employees are entitled to when their employment is terminated without just cause, as determined by previous cases instead of statutory rules. This type of severance considers a number of factors to ensure the employee is compensated in a fair manner. These factors might encompass the employee’s seniority, age, role within the company, and the availability of similar jobs. Common law severance usually provides a more customized and often more comprehensive compensation package compared to statutory severance, which is based on a set formula. This approach recognizes the special challenges an employee might encounter in finding new employment and aims to alleviate those difficulties as much as possible.

How is Common Law Severance Distinct from Statutory Severance?

Common law severance differs significantly from statutory severance in its calculation and considerations. Statutory severance, as set out by the Employment Standards Act (ESA), uses a fixed formula primarily based on the employee’s length of service and weekly earnings to determine minimum compensation. On the other hand, common law severance takes a broader view, considering the employee’s age, position, and the current job market conditions. This comprehensive assessment aims to provide a more equitable compensation package, often resulting in higher severance payments compared to the statutory minimum, specific to the employee’s specific circumstances and the challenges in attaining a similar kind of employment.

What Factors Influence the Amount of Severance Pay at Common Law?

The amount of severance pay an employee may receive under common law is influenced by a multitude of factors. These might include the employee’s length of service, with longer duration generally leading to higher severance pay. Age is another critical factor, as older employees may find it harder to secure new employment. The significance of the employee’s role within the company is also significant; those in higher or specialized positions can receive greater severance due to the difficulty of finding similar roles. Not only this, but the job market’s availability of comparable employment plays a role, with more competitive markets leading to higher severance awards. The manner of dismissal, especially if the employer acted in bad faith, can also impact the severance amount.

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How does the Court Determine Severance Pay at Common Law?

Courts determine severance pay at common law by taking a holistic view of a variety of factors to ensure fair compensation uniquely applicable to the employee’s situation. Factors considered include the length of the employee’s time with the company, their age, position, and the availability of similar jobs. Courts also examine the circumstances of the termination, including whether the employer provided reasonable notice or acted in bad faith.

This process, known as giving “reasonable notice,” aims to cover the employee’s lost wages, benefits, and other employment-related earnings during the notice period. The objective is to approximate what the employee would have earned had they been given adequate notice of termination, and to match this amount.

Why is Common Law Severance Typically Higher than Statutory Severance?

Common law severance tends to be higher than statutory severance because it considers a wider range of factors affecting an employee’s ability to find new work. While statutory severance provides a baseline of compensation based on a rigid formula, common law severance evaluates the unique circumstances of each employee. This includes factors such as age, length of service, job position, and job market conditions, all of which can significantly influence the time and difficulty an employee might face in securing comparable employment. Additionally, common law severance may account for other losses, such as benefits and bonuses, resulting in a more comprehensive and often higher than what is set out by statutory law.

How does Common Law Severance Address the Financial Impact on an Employee’s Future Earning Potential?

Common law severance aims to provide comprehensive compensation that goes beyond the immediate financial loss an employee faces upon termination. One of the key considerations under common law severance is the potential long-term impact on an employee’s future earnings. This includes evaluating the likelihood of the employee securing comparable employment and the length of time that it may take to do so. Factors such as age, industry conditions, and the employee’s specific skills and experience play a significant role in this assessment.

Courts recognize that older employees or those in specialized roles may face greater challenges in finding new employment, which can affect their future earning potential. As a result, common law severance often includes a higher compensation amount to account for the longer job search period and the possible need for retraining or career shifts. This approach ensures that the severance pay not only covers immediate financial needs but also supports the employee during the transition to new employment, thereby mitigating the long-term financial impact of the termination.

By addressing future earnings potential, common law severance offers a more reasonable and fair compensation package, addressing the real economic consequences of losing one’s job. This holistic view helps prevent employees from experiencing prolonged financial hardship and supports their reintegration into the workforce.

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Recent Cases

M.D. v. Equitable Life Insurance Company of Canada, 2018 ONSC 3130

In this case, the Superior Court awarded a long-term employee 30 months of severance pay. M. D., who had been employed for over 37 years, was terminated without just cause. The Court found that the traditional cap of 24 months for common law severance was not a bright-line or clear-cut limit and could be exceeded in special cases. Given M.D.’s long tenure, age, and the specialized nature of his role, the Court determined that a 30-month notice period was reasonable to correspond with the difficulty he would encounter in attaining a similar job. This demonstrates the flexibility of the limit for common law severance damages.

The Court of Appeal for Ontario reviewed the dismissal of M.D., a Vice President at Equitable Life, who was terminated without just cause after 37 years of service following a relatively minor dispute about tickets to a sports event. M.D. sued for wrongful dismissal, and both parties sought partial summary judgment on the appropriate notice period and M.D.’s entitlement to bonus payments.

The trial judge initially awarded M.D. 30 months’ notice and entitlement to bonus payments during this period. Equitable Life appealed, asserting that the notice period was excessive and that M.D.’s entitlement to bonuses was limited by termination provisions in their bonus plans.

The appellate Court lowered the notice period to 24 months, finding no exceptional circumstances to justify a longer period. It agreed that the bonus payments were an essential part of M.D.’s compensation, but upheld that the termination provisions limiting bonus entitlements were enforceable only if clearly communicated to M.D. The Court found that Equitable Life had not effectively communicated these provisions to M.D., making them unenforceable in this case.

The judge’s award for 24 months’ notice and corresponding bonus payments was upheld, emphasizing the importance of clear communication of any limiting terms in employment contracts. The Court dismissed Equitable Life’s appeal on bonus entitlement, emphasizing that the failure to properly inform M. D. of the termination provisions precluded their enforcement. This decision indicates the need for employers to clearly communicate all terms, especially those that might limit an employee’s compensation rights upon termination.

M.A. v. Best Theratronics Ltd., 2019 ONSC 266

M.A., a long-term employee with over three decades of service, was given 24 months of severance pay. The Court considered his age, length of service, and the specialized nature of his employment in determining the severance amount. This case reinforces the principle that long-serving employees in specialized roles may be entitled to the upper range of common law severance, reflecting the challenges they face in the job market.

R. v. Keddco Mfg., (2011) Ltd., 2019 ONCA 125

In this case, the Ontario Court of Appeal upheld a 19-month severance award for J. R., who was terminated after nine years of service. The Court also awarded $100,000 in punitive damages because of the employer’s bad faith conduct during the dismissal process. This case shows us the importance of the manner of termination and the potential for additional damages if an employer acts in bad faith, thereby increasing the overall severance compensation.

J.R., who was terminated as president of Keddco in June 2015, was accused of fraud without specific details. When J.R. mentioned he would hire a lawyer, the company threatened a costly counterclaim. J.R. subsequently filed a lawsuit for wrongful dismissal, and Keddco counter-claimed for $1.7 million, alleging unjust enrichment, breach of fiduciary duty, and fraud.

Here, the judge held that Keddco’s allegations were baseless and determined that the counterclaim was a way to indirectly intimidate J. R. The judge awarded Ruston 19 months’ severance pay, $100,000 in punitive damages, and $25,000 in moral damages, citing the company’s bad faith and intimidation tactics.

Keddco appealed, asserting that the severance period was excessively long and contesting the damages awarded. The Court of Appeal dismissed the appeal, concurring with the trial judge’s assessment and emphasizing that the awards were rational and justified in light of the evidence and circumstances. This case reinforces the importance of good faith in employee terminations and the potential for significant damages when an employer acts in bad faith, especially in cases involving termination.

About the Author

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Jordan Donich

Jordan Donich has been a Lawyer for over 10 years and is a trusted legal analyst by Canadian Media. He is as a leader in Canada’s tech sector for lawyers and developer of Law Newbie. Jordan is a Black Belt with the Japan Karate Association and trained in Krav Maga. He won a Gold Medal at 2004 Canadian National Championships and was published in the National Newspaper Awards.

Jordan has been featured in Forbes and is a member of DMZ Angels in Toronto.