How to Achieve Cost Certainty with Employee Terminations

One of the simplest questions I am often asked by employers but have the hardest time answering is: “If I
terminate Mr. Smith’s employment, what does the law say I owe him?” Most of the time, the best answer I
can give is: “You owe Mr. Smith somewhere between $X and $Y.” Some employers are surprised to learn
that they have to comply with the minimum provisions set out in the applicable provincial or federal
employment standards legislation. Many are even more surprised to learn that the employee is often
entitled to common law damages in addition to the notice or payment requirements mandated by the
employment standards legislation.

This article will explore why it is so difficult in most circumstances to provide a more concise answer to the
simple question, “What does the law say I owe?” and explain what employers can do to help eliminate the
uncertainty.

Employment Standards Legislation
Employment standards legislation sets out the bare minimum an employee is entitled to receive when
being terminated without cause. The legislation sets out the minimum notice or pay in lieu of notice for
an employee, and is typically based on the principle that longer service dictates greater notice or pay in
lieu of notice up to a statutory maximum. Under employment standards legislation, determination of the
notice or pay in lieu of notice is formulaic. What many employers do not recognize, however, is that
meeting the requirements of employment standards legislation will not shield them from claims for
common law damages for wrongful dismissal.

Common Law
At common law, an employer’s failure to provide reasonable notice of termination of employment gives
rise to a claim for damages by the employee. The measure of the damages is the amount required to put
the employee in the position he or she would have been in had reasonable notice been given. However,
determining reasonable notice at common law is not formulaic, such as it is under the employment
standards legislation. Reasonable notice at common law is a function of four main factors: 1) the length of
service; 2) the age of the employee; 3) the character of the employment (sometimes called the
“employee’s position in the enterprise”); and 4) the prospects for re-employment.

Law Damages
Common law has imposed a rough upper limit of 24 months on awards for failure to provide reasonable
notice of termination. Determining the proper amount below that rough upper limit is difficult. While
some would say there is a rough rule of thumb that each year of service generates a month of notice,
most judges and lawyers would disagree. Generally, judges take the view that older employees are
entitled to more notice than younger employees. Judges also take the view that longer service entitles an
employee to more notice than shorter service. In addition, if the employee’s prospects for re-employment
in a similar position are poor, the notice period will be longer than if the prospects are good.

Until recently, it was generally understood that employees in more senior and responsible positions
should receive greater notice than lower-level employees. However, recent case law suggests that the
rationale for giving greater notice to senior-level employees may be outdated and contrary to human
rights principles.

Manage the Uncertainty
Trying to determine in advance what weight a particular judge will put on each of these four main factors
is a daunting task, and usually results in a guesstimate range of damages rather than a precise figure.
What surprises me is that employers allow for this element of uncertainty in their businesses when they

strive so hard to eliminate uncertainty in other areas. Eliminating the uncertainty about what a terminated
employee is entitled to is as easy as providing for the consequences of termination in the employment
agreement.

Most employers do not know that common law damages can be expressly limited in a written
employment agreement to the minimum amounts payable under the employment standards legislation.
If the position you are looking to fill demands greater notice than the minimum provided for in the
employment standards legislation, specify in a written employment agreement what that notice will be.

In Summary
By using a written employment agreement to specify obligations for notice or pay in lieu of notice,
employers will gain certainty in knowing their financial exposure. Moreover, they will avoid paying the
unnecessary legal bills that typically arise when employers and employees dispute what should be paid
on termination because it was not addressed at the start of employment.

 

Tags: Article; Employment; Paul R. Miller