Ruling bases severance obligations on nationwide payroll

Justice Paul Kane of the Ontario Superior Court of Justice has challenged existing jurisprudential wisdom by holding that the payroll used for determining an employer’s liability for statutory severance should be calculated with reference to all of a company’s Canadian operations.

“The ruling is contrary to everyone’s belief as to how payroll is determined in this context and may even suggest that U.S. payrolls should be taken into account,” says Jeff Goodman of Hicks Morley Hamilton Stewart Storie LLP’s Toronto office.

Paquette v. Quadraspec Inc. involved an employee who started working for one of Quadraspec’s predecessors in 1983 and continued to work for other predecessor companies. In 1988, he signed a new employment contract as general director of Placage Inc.’s operations in Oakville, Ont.

Eleven years later, Quadraspec merged with Placage and terminated Paquette. The new company operated in Ontario and Quebec. The Ontario payroll was less than $1.5 million, but its Quebec payroll was double that amount.

The employment contract limited Paquette’s severance, but he brought a motion for a determination that the document was void. In the alternative, Paquette argued he should receive severance pay pursuant to s. 64 of the Employment Standards Act.

Section 64 requires employers with a payroll of $2.5 million or more to pay severance to employees who have at least five years’ service. The practice has been to take into account only payroll arising out of Ontario operations. Both the Ontario Ministry of Labour and the Ontario Labour Relations Board have consistently approved this approach.

But Kane held that the legislature didn’t intend to limit the payroll calculation in that way. He noted that the Hansard debates of 1987 that led to the $2.5-million threshold demonstrated that the purpose of the provision was to protect workers who worked for a company “that is part of a larger enterprise.”

Kane also noted s. 64 doesn’t specifically limit the calculation to a company’s Ontario payroll. By way of contrast, for example, the Pay Equity Act defines payroll as the “total of all wages and salaries payable to the employees in Ontario of the employer.” While the legislature was free to use similar limiting language in the Employment Standards Act, it hadn’t done so.

In Kane’s view, previous decisions limiting the act’s application to workers in Ontario weren’t relevant to the case at hand. He concluded s. 64 doesn’t govern payrolls in other provinces. Rather, the Ontario legislature, which clearly has authority to legislate with regards to employers that operate in this province, could also legislate with regards to the impact of their overall payrolls on Ontario employees.

Paul Boniferro of McCarthy Tétrault LLP’s Toronto office says flatly that Quadraspec is wrong in law.

“From a constitutional perspective, provincial statutes attach only to labour relations with the province,” he says.

“If you can reach outside the jurisdiction to determine severance pay, why couldn’t a union certification issued by the Ontario Labour Relations Board also apply to the operations of the same company outside Ontario’s borders?”

According to Boniferro, regulations and interpretation guidelines under the Employment Standards Act have gone so far as to limit s. 64 payroll calculations to individual establishments of a company operating at more than one location in the province.

“There are cases that say that a company does not meet the $2.5-million standard because an establishment in one part of the province is very different from an establishment elsewhere in the province,” he says.

“If the payroll calculation can be so limited, it doesn’t make sense that it could be expanded beyond the Ontario border.”

Ottawa lawyer Sean Bawden, writing in Kelly Santini LLP’s employment law blog, noted the new approach could be “huge” for Ontario employers with operations outside the province. It could, for example, catch an employer whose operations in Ontario are relatively minor but whose total Canadian payroll exceeds $2.5 million. Quadraspec, Bawden concluded, “has the very real potential to increase” employers’ contingent labour costs.

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