Ontario Court: ‘total payroll’ must be considered when assessing employer severance pay obligation

Section 54 of the Ontario Employment Standards Act requires that employers in the province must provide either notice or pay in lieu of notice, up to a maximum of 8 weeks, if they dismiss an employee (except in cases of serious employee misconduct). 

In addition to this requirement, certain Ontario employers must also provide statutory severance pay.  The requirement to pay statutory severance pay is set out at section 64 of the Employment Standards Act and is activated where two conditions are met:

1. The employee has been employed for at least 5 years; and
2. The employer has an annual payroll of $2.5 million or more.

In these circumstances, the dismissed employee will be entitled to receive an additional payment of 1 week per year of service. Statutory severance pay, unlike statutory notice, is an earned benefit that compensates long-serving employees for their past service and investment in the employer’s business.

Severance Pay obligation based on employer's ‘total payroll’

In Wissing et al. v. Adtran Networks Canada Inc., (unreported) a recent Ottawa decision of the Ontario Superior Court, Small Claims Division, the Court considered the following question:

When assessing whether an employer has a $2.5 million payroll, and is thus required to pay severance pay, do we look at the employer’s total payroll, or only its Ontario payroll?

In Wissing, five employees were dismissed from Adtran Networks Canada Inc (the “Company”). Each of the employees had worked for the Company for at least 5 years. On termination, the Company refused to pay statutory severance pay, asserting that the Company did not have a $2.5 million payroll.

Wissing et al. made two arguments: 

1. that the Company, along with ADTRAN Canada, Inc. and ADTRAN Inc. (the “Companies”) constituted one employer for the purposes of the Employment Standards Act, and that the combined payroll of the Companies was greater than $2.5 million.
   1. The Companies formed ‘one employer’ as they shared common ownership, common management and shared a high degree of integration.
2. The Employment Standards Act requires that in assessing payroll, the Court look at “total wages earned by all of the employer’s employees.” By definition, this language does not limit an assessment to only Ontario payroll, and the Court should refuse to read in these words to the Employment Standards Act.

In response, the defendants asserted that the Companies did not constitute ‘one employer’, and as such their collective payrolls could not be considered when assessing any employee entitlement to severance pay. In addition, the Companies argued that the Employment Standards Act's jurisdiction is limited to Ontario. Therefore, its reference to “total wages earned by all of the employer’s employees” can only apply to Ontario employees.

The Court’s decision

The Court rejected both arguments put forward by the Companies. Deputy Judge McCarthy determined that the Courts must consider ‘total payroll’ in assessing severance pay obligations. In reaching this conclusion, he relied on the Justice Kane’s earlier reasoning in Paquette v. Quadraspec Inc., stating:

I find the total payroll of an employer, and not just its Ontario payroll, is to be considered in determining whether employees are entitled to severance pay under the ESA [...]

At paragraphs 53, 54, 55 and 58 of Justice Kane’s decision, he dealt directly with the issue as to whether the addition of the words “in Ontario” by law, or implicitly, should be read into s. 64 of the ESA. At paragraph 53 of the decision he rejected the assertion.

[…]

I also find Justice Kane’s decision in Paquette v. Quadraspec Inc. is binding on this Court, based on the principle of stare decisis. If I am wrong and I am not bound by Justice Kane’s decision, I find the decision on point and entirely persuasive, and on that basis I intend to follow it.

Deputy Judge McCarthy then determined that the Companies did constitute ‘one employer’ for the purposes of the Act, thus satisfying the $2.5 million payroll requirement. In this regard, the Court found that the Companies were carrying on associated or related activities and thus had a “close functional interdependence.” Specifically, the Companies’ production and sale of products was a joint effort and they further shared common quality assurance control, HR personnel, IT support and email domain (@adtran.com).

Takeaway for Ontario employees and employers

Wissing is an important decision for Ontario employees and employers alike. It confirms that in assessing an employee’s entitlement to statutory severance pay, the Courts will look at the employer’s total payroll, not just that of its Ontario operations. Accordingly, employers with significant operations in other jurisdictions should be alive to this reality to avoid unexpected liability. 

The decision also furthers the underlying purpose of the Employment Standards Act: to protect employees and to be read broadly in a manner that extends minimum standards to as many workers as possible.

Finally, Wissing serves as a reminder that while businesses are free to structure their operations in a manner that best serves their organizational needs, the Courts will not be constrained by formal structures, such as the use of various different corporate entities, in assessing whether a company, or a group of companies, is functionally operating as ‘one employer’.

This article was originally published on June 16, 2017 at First Reference Talks.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca