$2.5 million payroll threshold for ESA severance pay includes global – not just Ontario – payroll, says Ontario Division Court

June 17, 2021 − by Larysa Workewych − in General − Comments Off on $2.5 million payroll threshold for ESA severance pay includes global – not just Ontario – payroll, says Ontario Division Court

Ontario employers have long understood that if their annual Ontario payroll (total wages paid to employees in Ontario in a year) is under $2.5 million, they do not owe severance pay under the Employment Standards Act, 2000 (ESA).

A recent Ontario Divisional Court decision says that that understanding is wrong. The court stated that an employer’s global payroll, including the payroll of global affiliates, must be counted towards the $2.5 million.  If this result holds, many small Ontario employers that have international parents or affiliates will now owe ESA severance pay to terminated employees who have 5 or more years of service.

Section 64 of the ESA states that an employer owes ESA severance pay only if the employee has 5 or more years of service and (1) the employee was severed because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result or (2) the employer has a payroll of $2.5 million or more.

The Ministry of Labour’s Employment Standards Act, 2000 Policy and Interpretation Manual expressly states the Ministry’s view that only payroll in Ontario is counted towards the $2.5 million threshold. The Ontario Labour Relations Board (OLRB) has also decided that only Ontario-based payroll is counted towards the $2.5 million.

On June 15, 2021, the Ontario Divisional Court decided in Hawkes v Max Aicher (North America) Limited[1] that both the Ministry of Labour and the OLRB were wrong. The court held that employers must include payroll in Ontario and outside of Ontario, and also outside of Canada.

Previously, the OLRB had decided that only the employer’s Ontario payroll should be considered. So Mr. Hawkes lost the first round and was denied ESA severance pay at the OLRB level because the employer’s Ontario payroll was under $2.5 million.

Mr. Hawkes challenged the OLRB’s decision at the Divisional Court, where he won. The court disagreed with the OLRB and stated that section 64 of the ESA does not explicitly set out provincial geographical limits on the employer’s payroll. The court counted Mr. Hawkes’ employer’s German parent company’s payroll for the purposes of the $2.5 million threshold. As such, he was entitled to ESA severance pay. The court noted that the Supreme Court of Canada has repeatedly affirmed that the ESA is a benefits-conferring legislation and should be interpreted to extend protections to as many employees as possible.  

In response to arguments raised about practical concerns for employers with operations inside and outside of Ontario, the court said that enforceability is not an obstacle to interpretation; to the contrary, the court said, Employment Standards Officers with the Ministry of Labour have broad power under the ESA to request information about an employer’s foreign payroll records, including the power to issue an order to produce such information. 

The consequences of Hawkes may be significant for foreign employers with small operations in Ontario. Firstly, the Ontario employees will now be entitled to severance pay even if the payroll of the Ontario operations is very small, as long as the global payroll is at least $2.5 million. Secondly, long-service foreign employees of an international business who are transferred into Ontario and later terminated in Ontario, may (depending on how the Hawkes decision is applied) be entitled to ESA severance pay based on their entire period of service with the business – not just service in Ontario.

Also, employers faced with complaints under the ESA, who have international parents or affiliates, can also expect Employment Standards Officers with the Ministry to request documents showing their global – not just Ontario – payroll.

What should employers do as a result? First, review the termination clauses in their employment agreements for enforceability.  An enforceable termination provision may limit termination obligations to the ESA minimums and avoid greater common law entitlements, which would provide at least some cost relief for employers.  Secondly, start considering their global payroll towards the $2.5 million ESA severance pay threshold.

[1] 2021 ONSC 4290.

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