Everything you need to know about termination pay and reasonable notice
It’s never easy to terminate an employee but it is inevitably something most employers will be faced with at some point in time. To protect the business from litigation or financial damages it’s important for every employer to understand employee rights such as reasonable notice during the termination process. Here’s a summary to help you better understand your legal obligations as an employer in the event of a termination.
What are my options for terminating an employee?
According to the Employment Standards Code employers have three options for terminating an employee:
- The employer can provide termination notice before the dismissal date;
- In lieu of notice employers can choose to pay employees severance t equal to (or greater than) what they would have earned during the termination notice period; or
- Employers can provide termination notice and severance. For instance, if an employee is entitled to two weeks reasonable notice, the employer can have them work the first week and pay severance for the second week.
How do I determine reasonable notice periods?
The following is a guideline to help you understand what factors are used to determine the minimum notice periods for employees who are entitled to receive them.
1.The length of employment. Employment periods are used to determine reasonable notice as follows:
- Employed between 90 days and 2 years – 1 week;
- Employed between 2 and 4 years – 2 weeks;
- Employed between 4 and 6 years – 4 weeks;
- Employed between 6 and 8 years – 5 weeks;
- Employed between 8 and 10 years – 6 weeks; and
- Employed for over 10 years – 8 weeks
2. Employee’s age. Age makes it more difficult for older individuals to find employment comparable to their current position therefore, they are entitled to longer notice periods.
3. The character of the employment. Employees who hold management or executive-level positions are eligible to receive a longer notice period on account of position scarcity.
Availability of similar positions in their geographic location. The Courts consider the job market and geographic location and determine the reasonable notice period based on how difficult it will be for an individual to find comparable work.
In general, the employer’s financial circumstances will not be considered when calculating reasonable notice.
What compensation is an employee entitled to upon termination?
Employers should familiar with the compensation eligible employees are entitled to during the reasonable notice period or in their severance package. Generally, compensation includes:
- Regular salary;
- Health and dental benefits;
- Pension and RRSP contributions; and
- Vacation pay.
What about commission or bonuses?
Determining if an employee is entitled to commissions or bonuses during the reasonable notice period is complicated. If bonuses or commissions are considered an integral part of the employee’s compensation structure and occurred frequently it is likely the employee is entitled to them. For example, if a salesperson receives 40% of their income from commission and they received that commission nine out of ten years they worked for an employer they will likely be entitled to it on termination. Alternatively, if a bonus is at the discretion of the employer and was not frequently awarded the employee is less likely to be entitled to it.
Should I add termination provisions to my employment contracts?
- By adding termination provisions in employment contracts employers have the ability to reduce notice periods. When including such provisions, the employer is responsible for making sure the employee is able to clearly understand what compensation they are entitled to in the event of termination or the common law factors will be used to determine the length of reasonable notice. The employer must also ensure that the termination provision does not violate the minimum standards set out in the Code. This includes any potential future violation.
- Example: A provision cannot state that an employee will only be entitled to three weeks reasonable notice as that would violate the Code on the employee’s four-year employment anniversary.
Under what circumstances would reasonable notice not be required?
Reasonable notice is not required under the following circumstances:
- If the employee is terminated for just cause (learn more);
- If the length of employment is 90 days or less;
- The term of employment ends;
- If an employee refuses a reasonable alternative form of work;
- The employer is unable to fulfil their contractual duties by reason of unforeseeable or unpreventable causes (aka frustration of the employment contract); or
- Seasonal employee.
Understanding reasonable notice and severance pay is vital to the success of every employer. If employees don’t receive notice or pay in lieu of notice they are entitled to upon termination, they have the ability to claim wrongful dismissal and seek damages against you.
To limit your liability and financial risk we recommend including a termination provision in your employment contracts. If you need provisions written or reviewed we’re happy to help out. Contact us today and we’ll have one of our team members reach out to you shortly.