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Employers’ financial difficulties irrelevant when calculating notice periods

contractofemploymentCompared to employment, business ownership can offer independence and control, but can also create inescapable financial and other obligations. Salaries and other expenses must be paid regardless of how poorly the business does. The inescapable obligation to pay the appropriate notice pay when employees are terminated, was recently the subject of an Ontario Court of Appeal (ONCA) case. The employer was not allowed to reduce the employees’ reasonable notice pay because of its financial situation.  (See Michela v. St. Thomas of Villanova Catholic School, 2015 ONCA 801.)

Background

The three appellants had been teachers at a Catholic school. They had been employed in a series of one-year contracts for between 8 and 13 years. In May 2013 the school warned them that it may not be able to continue their employment because enrollment was down. By June 2013 the school confirmed that it was in fact not able to continue their employment because of low enrollment. The school alleged that the employees were not entitled to notice pay because they were employed in fixed-term (i.e. one-year) contracts.

A lower court judge determined that notwithstanding the series of one-year contracts, the teachers were employed for indefinite terms and were entitled to reasonable notice or pay in lieu. The lower court judge determined that the teachers were entitled to 12 months’ reasonable notice pay, but reduced it to 6 months because of the employer’s financial situation and his determination that the employees would be able to secure alternative employment within 6 months after their termination. The employees appealed the reduction of their reasonable notice pay.

The law of reasonable notice

The purpose of reasonable notice is to give employees time to secure alternative employment. If an employer does not provide reasonable notice or pay in lieu of reasonable notice when it dismisses an indefinite term employee without cause, the employee is entitled to damages suffered as a result of the employer’s failure to provide reasonable notice. This is usually the reasonable notice pay that the employee was entitled to.

But the calculation of reasonable notice pay is not always straightforward. While the law has developed a list of factors to consider, the calculation depends on the facts associated with a particular dismissal. A court case from the 1960s, still-used today, Bardal v. The Globe & Mail Ltd., outlines the factors that employers and courts must consider in fixing reasonable notice. Reasonable notice depends on the following factors, all based on the circumstances of the employee, not the employer: (i) the character of the employment (ii) length of service (iii) age and (iv) the availability of alternative employment given the employee’s experience, training and qualification.

The decision

The Court of Appeal said unequivocally that the financial circumstances of the employer are irrelevant – it will neither increase nor reduce the required notice period. The ONCA suggested that the lower court judge may have misinterpreted an earlier court case which said that when employment is unavailable because of general economic conditions there needs to be some limit on the notice period, even if the employee cannot secure alternative employment within the notice period granted. (See Bohemier v. Storwal International Inc. (1982), 1982 CanLII 1764.

The Court of Appeal explained that the above, and other statements from Bohemier have caused some confusion in wrongful dismissal cases. For example, in a 2014 case, notice pay was reduced by 1/3, in part because of the financial health of the employer. The Court explained that Bohemier merely meant that even if the employee had difficulty securing alternative employment because of general economic circumstances, this should not have the effect of increasing the notice period unreasonably.

The Court of Appeal also rejected the lower court judge’s presumption that because the 6-month notice period would take the teachers to Christmas, alternative employment would be available, on the basis that this determination was speculative – there is no evidentiary basis for this conclusion.

Three key takeaways from this case

  1. The employer’s financial health is irrelevant when determining reasonable notice – the focus is on the employee’s circumstances.
  2. Employers will not escape their obligation to provide reasonable notice or pay in lieu, merely by using a series of short-term contracts.
  3. The determination of the reasonable notice period is fact-specific and is based on evidence. For example, it is not enough to state that employees will be able to secure alternative employment in certain periods, without evidence.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools.
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