Severance Pay Determination No Longer Restricted to Ontario Payroll

August 26, 2021

On August 16, 2021, the Ministry of Labour, Training and Skills Development announced that the Employment Standards Act, 2000 Policy and Interpretation Manual (the “Manual”) has been updated in response to the recent Ontario Divisional Court decision of Hawkes v Max Aicher (North America) Limited (“Aicher”) that held that a Company’s global payroll should be considered when determining severance entitlements for terminated employees. This is big news for employers with a large global but smaller Ontario presence as well as for those employed by those entities.

In Aicher, the Divisional Court overturned the earlier Ontario Labour Relations Board (“OLRB”) decision and held that the calculation of payroll for the purposes of determining an employee’s entitlement to severance under the Employment Standards Act, 2000, SO 2000, c 41 (“ESA”) should be based on a combined payroll of the Ontario employer and its affiliated companies. This was a marked departure from the Ministry’s previous Manual that expressly stated that only payroll in Ontario should be considered in assessing the $2.5 million payroll threshold.

Section 64(1)(b) of the ESA provides that an employee is entitled to severance if they were employed by the employer for five years or more and “the employer has a payroll of $2.5 million or more”.

The OLRB previously held that although the company’s global payroll exceeded the requisite $2.5 million, section 64 must be read together with section 3 of the ESA, which it interpreted to limit the Board to only consider an employer’s payroll in Ontario. Section 3 provides that the employment standards in the ESA only apply if (a) the employee’s work is performed in Ontario; or (b) the employee’s work is performed in and outside Ontario but the work performed outside Ontario is a continuation of work performed in Ontario.

The Divisional Court disagreed, stating, among other things, that “when interpreting a statute, ordinarily the inclusion of words of limitation in one part of the act and not in another is seen as deliberate and meaningful.” In other words, since section 64(2) does not explicitly limit the calculation of an employer’s payroll to solely Ontario (unlike section 3), the legislators must have intended that such limitation does not apply. The Divisional Court made this determination with specific reference to the Supreme Court of Canada’s previous directions that where possible, the ESA should be interpreted in a broad and generous manner to protect as many employees as possible. The Divisional Court also noted that it made sense why Ontario would restrict entitlement to severance to work performed in Ontario, while simultaneously basing the requirement to pay severance on the overall size of the employer both within and outside Ontario.

Now, in light of Aicher, the Manual has been changed to require the $2.5 million payroll threshold to be based on an employer’s global payroll. Going forward, employers in Ontario with affiliated companies outside of Ontario and/or Canada will need to ensure that they consider external payroll when determining severance entitlements for terminated employees.