There is no shortage of ways to structure a severance package. A common way for employers to attempt to terminate an employee's employment, while keeping cash flow in check, is to provide the dismissed employee with "salary continuance," i.e. payment of salary over a period of time, rather than paying the employee a lump sum. A question that I am often asked is, can the employer legally require the employee to accept salary continuance?
Like most of the answers in our series Answers to Common Questions, the answer is "it depends"
Why the Answer is Sometimes "No."
The answer to the question "can an employer legally require an employee who has been dismissed to accept salary continuance?" is sometimes "no" because neither the Ontario Employment Standards Act, 2000 nor the common law really envision such a thing.
Section 61(1) of Ontario's Employment Standards Act, 2000 provides that:
An employer may terminate the employment of an employee without notice or with less notice than is required under section 57 or 58 if the employer,
(a) pays to the employee termination pay in a lump sum equal to the amount the employee would have been entitled to receive under section 60 had notice been given in accordance with that section; and
(b) continues to make whatever benefit plan contributions would be required to be made in order to maintain the benefits to which the employee would have been entitled had he or she continued to be employed during the period of notice that he or she would otherwise have been entitled to receive.
Therefore, for payments of statutory termination pay, which are the minimum amounts prescribed by the ESA, if an employer is going to provide an employee with pay in lieu of notice, then the legal requirement is that those payments must be provided in a lump sum.
But What About Large Amounts of Notice and the Duty to Mitigate?
Regular readers of this blog will know that (a) the minimum amounts of notice prescribed by the Employment Standards Act, 2000 are rarely the complete amount of notice and/or severance pay to which a dismissed employee is entitled. (For new readers looking for more information on this topic, have a look at the page What is Wrongful Dismissal?); and (b) employees who have their employment terminated by their employer are under a legal duty to "mitigate their damages" by finding new work, on this point see the post Explaining The Duty to Mitigate.)
So, if employees may be entitled to extended amounts of notice, sometimes upwards of two years or more, and the law requires employees to mitigate their damages by finding new employment, with the result that any dollar earned through mitigation is a dollar that the dismissing employer does not have to pay - how does the court deal with the fact that a lump sum payment may produce a windfall to the dismissed employee? The answer is imposed trusts.
Imposed Trusts
In the case of Bernier v. Nygard International Partnership., 2013 ONSC 4578 the Honourable Justice Edward M. Morgan ordered the employer to pay a dismissed employee eighteen months notice following a summary judgment motion.
In that case the employee had only been unemployed for a period of a little over six months at the time the case was heard. In addressing the issue that the plaintiff would be in receipt of roughly a year's worth of salary at the time of judgment, Justice Morgan imposed a trust in favour of the employer. Justice Morgan wrote the following in his reasons for decision with respect to this issue:
[61] As of today, there are still 11 months to go before the 18 month notice period will have expired. Although the situation raises a contingency with respect to mitigation, “it is well established that a plaintiff is entitled to have her/his wrongful dismissal claim heard prior to the expiry of the period of reasonable notice.” Bullen v Proctor & Redfern Ltd. 1996 CanLII 8135 (ON SC), (1996), 20 CCEL (2d) 36, at para 45 (Ont Gen Div).
[62] As Osborne J. put it in Thomson v Bechtel Canada Ltd. (1983), 3 CCEL 16, 23 (Ont HC):
The contingency of new employment within the notice period could be somewhat speculatively assessed and imposed upon the notice period to reduce it. In the circumstances of this case, I think it is preferable to impose upon the plaintiff a trust, whereby any earnings of the plaintiff until the expiry of the 11-month notice period will be impressed with a trust in favour of the defendant. I am satisfied that the plaintiff has endeavoured to obtain employment throughout and that he will continue with his sincere endeavours to obtain employment.
Under the terms of the general trust to which I have referred, the plaintiff will account to the defendant so as to reduce the defendant's obligation to pay the plaintiff to the extent that the plaintiff receives earnings from new employment within the notice period.
[63] The entire award is therefore impressed with a trust. At the end of the 18 month notice period, the Plaintiff will account to the Defendant for any new employment income she receives during the notice period and will reimburse the Defendant any such amounts received.
Why You May Have to Accept Salary Continuance
Even though salary continuance is not a legal mechanism for the payment of statutory termination pay, and even though judges will often not order it as a remedy in a wrongful dismissal case, that does not necessarily mean that (a) salary continuance is never 'legal' or (b) employees may not have to accept it.
For amounts in excess of statutory minimums, if the employer agrees to pay the employee reasonable notice and continue benefit contributions for an equivalent period of time, then the employee has no losses or damages, and therefore may be required to accept salary continuance. The key point is that the amount to be paid via salary continuance must be at least the reasonable amount of notice to which the employee is entitled. If the amount is less than reasonable, then it is immaterial whether the same will be paid via salary continuance or lump sum.
Thus, sometimes an agreement to receive salary continuance will have to be accepted. Sometimes accepting a salary continuance package makes economic sense; especially if the agreement includes other arrangements, such as a "half back" arrangement. Sometimes, however, the package is just a 'raw deal.'
Takeaways for Employees with Labour Pains
If you are a suddenly unemployed employee in Ontario and you have been offered a severance package, whether it includes a salary continuance provision or not, it likely makes sense to have that agreement reviewed by a professional employment lawyer. The experienced, professional, and cost-efficient employment lawyers for employees at Ottawa's Kelly Santini LLP would be pleased to be of service to you.
To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.
Takeaways for Employers with Labour Pains
If you are an employer in Ontario and you are considering ending the employment of one or more of your employees, then it may be prudent to seek professional legal advice. The experienced, professional, and cost-efficient employment lawyers for employers at Ottawa's Kelly Santini LLP would be pleased to be of service to you. We can assist you by advising you on what a reasonable amount of notice would be, writing the letter of termination, and structuring the termination package in such a way to assist your business continue operations.
To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.
-As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.
Sean Bawden, publisher of Labour Pains, can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. He is also a part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice.
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