Startups and emerging companies are usually so focused on growing and scaling up that the thought of letting employees go is far from top of mind. However, it is important that employers and employees understand what employees are entitled to when they are terminated under the Ontario Employment Standards Act (“ESA”) and the common law.
NOTE: This blog post is concerned with the rights of non-unionized “employees” upon termination. If you’re wondering whether or not your workers are “employees” or independent contractors, check out our other blog post.
Generally, all non-unionized employees in Ontario are entitled to notice of termination, pay in lieu thereof (aka “termination pay”), or a combination of the two. This entitlement comes from two sources:
- the common law (aka “judge made law”), and
- the Employment Standards Act.
There are several important differences between common law termination rights and the minimum standards for termination notice and pay provided by the ESA, including:
- When an employee is “terminated” – The ESA has strict definitions for when an employee is considered terminated. At common law, termination generally refers to when the employment contract is terminated, and an employee’s entitlement to termination notice or pay may be dependent in part upon how the contract is terminated.
- Calculation of termination notice and pay – The ESA sets minimum standards for termination notice or pay in accordance with a prescribed formula. The common law calculates how much termination notice or pay an employee is entitled to based on a variety of judicial factors and can be considerably higher than the minimum standards of the ESA.
- The ability to “contract out” of termination rights – The entitlement to receive common law termination notice or pay can be contracted out of by an enforceable clause in an employment contract. By contrast, any attempt to contract out of or waive the minimum standards of the ESA is void.
- Termination for employee misconduct – The common law distinguishes between employees terminated “without cause” and those terminated “for cause”, the former being entitled to termination notice or pay while the latter is not. No such distinction exists in the ESA, however the ESA does provide that certain conduct disentitles employees from termination notice or pay.
When is an Employee’s Employment Terminated?
According to the ESA, an employee’s employment is “terminated” and the employee is generally entitled to termination notice or pay when an employer:
- Dismisses or stops employing an employee, including where an employee is no longer employed due to the bankruptcy or insolvency of the employer.
- “Constructively” dismisses an employee, and the employee resigns in response within a reasonable time. A constructive dismissal may occur when an employer makes a significant change to a fundamental term or condition of an employee’s employment without the employee’s actual or implied consent.
- Lays an employee off for a period that is longer than a “temporary lay-off”. A temporary lay-off is generally where an employer temporarily reduces or pauses an employee’s employment with the understanding that the employee will be recalled within a certain period of time. If the lay-off exceeds the maximum length prescribed by the ESA, the lay-off will transform into a termination at law, entitling the employee to termination rights.
At common law, an employee employment is terminated where the employment contract has been terminated. This can occur in several ways, such as employee resignation, express or “constructive” dismissal, or expiration of an agreed upon period of employment, etc. Depending on the circumstances that give rise to the employment contract being terminated, an employer may not be required to give “reasonable notice” of termination. This is the case where, for example:
- the employee resigns from their employment;
- the employment contract is “frustrated”; or
- the employment contract is for a fixed term.
Termination for Employee Misconduct
In Canada, employers are generally not required to provide a reason for terminating their employees. However, in certain circumstances, an employee’s misconduct may be so serious as to disentitle them to any termination notice or pay.
The ESA provides that employers are not required to give termination notice or pay where the actions giving rise to termination amount to “wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer”.
At common law, an employee can be summarily dismissed (i.e. terminated without notice or pay) if their employment is terminated for “just cause”. Generally, termination for cause means termination for reasons related to serious employee misconduct. Just cause for summary dismissal will depend upon the circumstances, and can arise in a single incident or from cumulative incidents.
More commonly, an employee’s employment is terminated for reasons other than “just cause” (aka “termination without cause”) or the strict “wilful misconduct” standard in the ESA. For example, an employee may be terminated for poor work performance, financial reasons, or for reasons relating to “lack of fit” within the workplace community. In those circumstances, the employee will generally be entitled to termination notice or pay unless other exceptions apply.
Calculating Notice of Termination or Pay
1 – Written Notice of Termination Under the ESA
As a general rule, the ESA provides that employees who have been continuously employed for more than three months are entitled to termination notice.
The amount of notice required depends upon the employee’s “period of employment”, which includes not only the time an employee is actively working but also any time they are not working but the employment relationship still exists.
The minimum amount of written notice of termination required under the ESA is:
Period of employment
Notice required (weeks)
Less than one year
Between 1 and 3 years
Between 3 and 4 years
Between 4 and 5 years
Between 5 and 6 years
Between 6 and 7 years
Between 7 and 8 years
Greater than 8 years
During the statutory notice period, the employer must:
- not reduce the employee’s wage rate or alter any term or condition of employment;
- continue to make whatever contributions would be required to maintain the employee’s benefits plans; and
- pay the employee the wages they are entitled to, which cannot be less than the employee’s regular wages for a regular work week each week.
NOTE: There are special rules for a “mass termination” (i.e. termination of 10% or greater of the number of employees employed for at least three months). See this link for more information: https://www.ontario.ca/document/your-guide-employment-standards-act-0/termination-employment#section-11
2 – Common Law “Reasonable Notice” of Termination
It is important to remember that so-called “statutory notice” under the ESA is just a minimum. Under the common law, non-unionized employees terminated without cause may be entitled to greater notice than the statutory minimum provided by the ESA because employment contracts contain an implied obligation to give “reasonable notice” of termination.
Calculating the “reasonable notice” an employee is entitled to has been referred to as “an art not a science”. There are several factors courts consider in determining how much notice is “reasonable” in the circumstances, including the:
- character of the employment;
- length of employment;
- age of the employee; and
- availability of similar employment, having regard to the experience, training, and qualifications of the employee.
Courts have set a “rough upper limit” of 24 months of notice, absent exceptional circumstances.
Employees are not entitled to common law notice if they signed an employment agreement with their employer that provides that the employee is only entitled to statutory notice under the ESA. However, if that clause is unenforceable, for example if it waives an employment standard (such as the written notice of termination standards in the ESA), the employee will be entitled to common law notice (see below). Employees are also not entitled to common law notice if their employment is properly terminated for cause.
3 – Pay in Lieu of Notice
At both the common law and under the ESA, the requirement to provide notice of termination may be satisfied if an employee is given pay in lieu of notice (also known as “termination pay”).
Termination pay is a payment equal to the regular wages for a regular work week that an employee would otherwise have been entitled to during the termination notice period. This includes other forms of pay such as vacation pay or regular bonuses. Employers must also continue to make whatever contributions would be required to maintain the benefits the employee would have been entitled to had they continued to be employed through the notice period.
NOTE: In the ESA, termination pay is not the same as “severance pay”, though the two terms are often used interchangeably in the common law context. For information on the severance pay provisions of the ESA, visit this link: https://www.ontario.ca/document/your-guide-employment-standards-act-0/severance-pay
The ESA prohibits an employer from attempting to contract out of or waive an employment standard, and any such attempt to do so is void. For example, employers generally cannot ask their employees to sign a contract limiting their compensation to below minimum wage, as such an agreement would be void for non-compliance with the minimum wage provisions of the ESA. Likewise, employers cannot contract out of or waive the minimum written notice of termination provisions or pay in lieu of notice provisions of the ESA.
However, the requirement to give “reasonable notice” of termination at common law can be contracted out of, thereby eliminating the requirement to give common law notice of termination or termination pay. Therefore, the question of whether the termination clauses in an employment contract are valid can be essential to determining how much termination notice or termination pay an employee is entitled to.
Employers must be careful in drafting termination clauses to ensure they do not breach the minimum standards of the ESA. The Ontario Court of Appeal recently confirmed in Waskdale v Swegon North America (2020 ONCA 391) that the entirety of a termination provision must be read as a whole to determine whether it complies with the ESA. If one element of a termination clause does not comply with the ESA, the entire clause does not comply with the ESA, and it will be found to be void. Importantly, a severability clause cannot “sever out” non-compliant portions of a void termination clause, which would otherwise leave the other elements intact.
Meet the Authors:
Dylan Gibbs | Student-at-Law
John Durland | Lawyer
© 2021, Gilbert’s LLP. All rights reserved. This post is provided for general information purposes only and does not constitute legal advice or opinion of any kind. Gilbert’s LLP does not warrant or guarantee the quality, accuracy, or completeness of any information in this post. This post is current as of its date of publication. It should not be relied upon as accurate, timely, or fit for any particular purpose.