DON’T SWEAT IT - How to Limit your Liability When Terminating

By Carissa Tanzola, Sherrard Kuzz LLP

 

With and Without Cause  

There are two principal types of termination: “with cause” and “without cause”.  “With cause” is a termination ‘for a reason’ including, for example, misconduct, wrongdoing or poor performance.  A “without cause” termination assumes the employee is not at fault, but the employer wishes to terminate the employment relationship nevertheless.  For example, the termination may be required due to restructuring, insufficient demand for the employee’s skills, cut-backs, etc.

In a non-unionized workplace, an employer can end an employment relationship for any reason whatsoever without having to justify its decision.  The only caveat is that the reason for the termination may not breach a contract or law such as the Human Rights Code or the Occupational Health and Safety Act.

Termination WITHOUT Cause  

Termination without cause comes with a price.

Reasonable Notice     

In every employment contract, whether verbal or written, there is an implied term the employer will provide “reasonable notice of termination” by way of working notice or pay equal to the amount the employee would have earned during the reasonable notice period. Reasonable notice has two components: statutory and common law
 
1.     Statutory Notice  

Provincial employment standards legislation sets out the minimum period of reasonable notice to which an employee is entitled upon termination without cause.  This is often referred to as notice or termination pay. Notice or termination pay is based on an employee’s length of service.  In Ontario it is roughly one week for every year of service up to a maximum of eight weeks.

A separate concept, often confused with notice or termination pay, is severance pay.  Depending on the employer’s total number of employees, the size of its payroll and the employee’s length of service, severance pay may be owed in addition to termination pay.  In Ontario, severance pay can be up to an additional 26 weeks.  These statutory minimums cannot be contracted out of by the employer or the employee.

2.      Common Law Notice

Without a valid and enforceable termination clause in a written employment contract, an employee is also entitled to common law reasonable notice.  This is known as “common law notice” and is awarded by courts in wrongful dismissal claims.  

The underlying purpose of providing common law notice is to give to the employee the time (or pay in lieu of time) reasonably required to secure similar employment.  As such, common law notice is assessed by considering the following factors :

• The employee’s length of service
• Availability of equivalent alternative employment
• Relevant education, training and experience
• The employee’s age

There is no easy calculation to determine common law notice entitlement, and it can range from a low of a few weeks to a high of 24 months.  This does not take into account additional damages which may be awarded on account of the employer’s poor behaviour during the termination process.

If the amount of common law notice to which the employee is entitled is greater than the statutory minimum notice entitlement, the common law notice subsumes the statutory notice (that is, the two are not added together –the common law notice prevails).

Limiting Liability  

An employer can limit its exposure to common law notice by ensuring the employee signs a written contract clearly outlining the amount of reasonable notice he/she will receive if the employee is terminated without cause.  A carefully worded termination clause usually provides for a notice period which meets the minimum statutory requirements.

Securing a Release

Whenever possible, when the proposed settlement payment is above and beyond the contractual or statutory minimum(s), the employer should request, in exchange for the payment, the employee execute a full and final release in favour of the employer.  A signed release can prevent an employee from successfully bringing future claims against the employer limiting the employer’s exposure and bringing closure. 

Termination WITH Cause

In both a unionized and non-unionized workplace, an employer can terminate an employee for cause.  In such a case, the employer is not required to provide either statutory or common law notice.

It is impossible to list all of the circumstances that could constitute just cause.  However, generally speaking, the following are examples of just cause: 

• Serious misconduct. Theft, dishonesty and assault.   

• Habitual neglect of duty or incompetence.  For such behaviour to constitute just cause, an employee must clearly understand the requirements of the job, the requirements must be reasonable and the employee must have been given the opportunity to improve.  

• Conduct incompatible with the employee’s duties or prejudicial to the business.  Activity during working hours that interferes with the employee’s employment obligations or is competitive with or damaging to the employer’s business.  

• Wilful disobedience.    

Onus of Proof  

The onus is on the employer to prove just cause on a balance of probabilities.  Just cause must be based on real incompetence or misconduct rather than on mere dissatisfaction with performance or concern for potential misconduct.  If an employer is unable to demonstrate just cause, the termination will be considered to be “without cause” and the employee will be entitled to reasonable notice.

Securing a Release

Even in a case of just cause, an employer may want to secure a release for the reasons outlined above. Technically speaking, the release may be obtained for a payment less than the minimum statutory or contractual requirement. However, there is a risk to structuring the settlement in this way. If in future, the employee successfully challenges the allegation of “cause” it is open to an adjudicator to set aside the release on the basis it was secured for insufficient consideration. To avoid this possibility, it is often advisable for an employer to pay an amount at least equal to the statutory minimum. Alternatively, an employer should ensure the release includes an agreement among the parties that the employee was terminated for cause.

Practice Tips

When terminating an employee, consider the following in order to assess and limit your liability:

• Is there an employment contract with the employee limiting notice to the statutory minimum?
• If the employment contract does not limit notice to the statutory minimum, does it address notice at all? 
• Why is the employee being terminated?
• How long has the employee been employed?
• What is the employee’s position and how easy will it be to find similar employment?
• How senior is the employee?
• How old is the employee?
• In the case of a ‘with cause’ termination does it make sense to offer some amount of notice in exchange for a full and final release?

To learn more or for assistance with these and related issue, contact a member of Sherrard Kuzz LLP.

Carissa Tanzola is a lawyer with Sherrard Kuzz LLP a management-side employment and labour law firm in Toronto.  Carissa can be reached at 416.603.0700 (Main), 416.420.0738 (24 Hour) or by visiting www.sherrardkuzz.com. 

The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice.  Reading this article does not create a lawyer-client relationship. Readers are advised to seek specific legal advice from Sherrard Kuzz LLP (or other legal counsel) in relation to any decision or course of action contemplated.