What's the Point of the Employment Standards Minimums?

Every management-side employment lawyer hears this question from time to time, usually dealing with small organizations operated by well-meaning people who are doing their best to conduct themselves the way they're supposed to:

What's the point of Employment Standards minimums?

The context is, pretty much invariably, a scenario where the employer has dismissed an employee, researched their obligations, found and satisfied the ES minimums, then gets a weird-sounding claim from the employee or a lawyer asserting that that isn't enough.

And in most cases, the employee or lawyer is right. The employer then calls someone like me, and I'll explain that just because their statutory obligations have been satisfied doesn't mean they don't have other obligations. I further explain the common law 'reasonable notice' framework, that requires payment of larger amounts. And the employer doesn't usually like this explanation: They're intelligent and successful entrepreneurs who have done their own research on the subject, found reliable information that seems to answer the question, and what I'm telling them flies in the face of those conclusions.

The inevitable question: If what I owe them is really dictated by this 'reasonable notice' concept, what's the point of the statutory minimums at all?

So this entry is a primer for small and mid-size employers on exactly this issue - the obligation to provide notice, and how that interacts with the statutory minimum obligations laid out in employment standards legislation.

Reasonable Notice, in a Nutshell

Every employment relationship is contractual in nature. Many people think of a 'contract' as something that's written, or as specifying some narrower type of relationship. But the reality is that every employee in the country has a contract, whether its terms are written or oral, express or implied.

So when we ask what an employer's obligations are in respect of terminating the contract, what we're really asking is "What does the contract say about termination?"

If the contract is otherwise silent - there's no enforceable express contractual term speaking to termination - then the common law implies a term of "reasonable notice".

This is usually measured in months. It's rare to see a notice period shorter than 2 months, or longer than 2 years. Most fall somewhere in between. There's a non-exhaustive list of factors we call the Bardal factors, referencing a 1960 Ontario decision that is well-acknowledged across the country: Age, length of service, character of employment, and availability of replacement employment.

All other things being equal, older employees get more notice than younger employees; long-service workers get more notice than short-service workers; higher levels of responsibility or specialization tend to attract longer notice periods; as does employment that will be difficult to replace.

Calculating reasonable notice isn't an exact science. There's no formula where we 'plug in' numbers then get a clear and inarguable number back. With the benefit of experience, I can usually come up with a pretty good estimated range off the top of my head, but really the exercise of fixing reasonable notice is one of researching what judges have given similarly-situated workers.  Even with that research, there's still almost always a range.

What the notice period *means* is that, in theory, you're actually supposed to give that much actual notice. (There was a time when Alberta law was a bit muddy on that precise point. I wrote a paper on that subject, and the Supreme Court of Canada, referencing my paper, cleared up any confusion in Matthews v. Ocean Nutrition.)

However, most employers don't give that much (or any) notice. There's nothing necessarily immoral about breaching a contract, but it just means that the breaching party may have to pay damages - compensating the person for their losses for not receiving notice. In this context, that means putting them in the position they'd have occupied had they been given actual notice - at first glance, paying them the wages and benefits they'd have received through the notice period.

We call that 'pay in lieu of notice'.

However, employers who don't want the significant and uncertain liabilities of 'reasonable' notice sometimes require their employees to enter into contracts that expressly specify termination entitlements, displacing entitlements to reasonable notice. If enforceable (though there are a bunch of hurdles to this), the contractual language can govern entitlements instead.

Statutory Frameworks

Every jurisdiction in Canada has a statute that sets out minimum entitlements on termination - which can be provided by way of actual notice OR pay in lieu. The exact formula varies. In Alberta, for instance, entitlements cap at 8 weeks of notice after ten years of service.

This can be a really rude awakening for some employers: You may think you have to pay 8 weeks to a long-service employee, then someone like me comes along and says that it's more like (for instance) a year or more.

But the statutory framework creates only minimum entitlements, not a comprehensive set of mutual entitlements and obligations: The purpose of employment standards legislation is to protect employees and to set out minimum standards, but they expressly do not displace greater employee rights that may exist under contract or common law.

There's an important general rule of interpreting employment standards legislation: If you're reading it as giving employers substantive rights or protections, you're almost certainly reading it wrong.

So if employees are usually entitled to more than that minimum anyways, what's the point?

Base Entitlements For Contractual Termination Provisions

One of the most important rules of employment standards is that you can't contract out of them. This means that if an employer puts a contract to an employee saying "This employment relationship can be terminated 'at will'" (to borrow an American concept), that clause is usually going to conflict with employment standards, and will be void as a result. (As it happens, statutory non-compliance is also one of the biggest reasons that termination clauses fail.)

This is one of the core features of employment standards notice: It establishes a minimum entitlement framework that regulates and restricts the types of contracts that parties can enter into. If you're not happy with the implied term of 'reasonable' notice, you can contract to something different, but you need to make sure that contract honours statutory minimum entitlements.

Timely Payment

One feature of amounts owing under employment standards legislation is that there's a statutory timeframe in which they're supposed to be paid. And it's technically an offence not to, though prosecutions are usually reserved for pretty extraordinary circumstances.

This means that employers have to pay the statutory minimum, in a timely manner, without negotiation or trying to hold out for a release.

It secures employees a modest sum upon dismissal, which helps offset some of the power imbalance between the parties.

Mitigation

One of the fundamental differences between statutory 'termination pay' and common law 'pay in lieu' is this: Pay in lieu is subject to a duty to mitigate, and to account for mitigation earnings. Termination pay isn't.

Here's what that means: If I get dismissed, and I'm entitled to 12 months' pay in lieu, I'm expected to take reasonable steps to find new employment. If I find a new job in that time, then the money I make during the notice period is subtracted out of my old employer's liabilities. In effect, if I get a new job with the same money after 6 months, my 12 months of entitlements effectively becomes 6 months.

Termination pay, however, isn't subject to mitigation. So even if I get a job making the same money the day after I get dismissed, I'm still presumably entitled to termination pay.

So the general gist here is this: In circumstances where statutory termination pay entitlements arise, they are strong non-negotiable entitlements to prompt payment of the full amount, not subject to mitigation.

Policy Discussion

There's occasionally a bit of backburner discussion in labour and employment circles: What if a government passed a statute that did supplant common law reasonable notice, and instead bolstered the statutory regime to something a bit more meaningful?

Most straightforwardly, this would look like a slightly-scaled-up version of statutory minimums, but also superimposing it as a contractual term that displaces other entitlements.

That's a problematic version. Aside from requiring a pretty substantial revision of the operation of employment standards (which, yes, could be done), it overrides freedom of contract in a way that lacks any real policy rationale. The statutory minimums are grounded in a public policy justification of protecting the party with less bargaining power - hence, prohibiting 'at will' employment, to protect vulnerable parties to contracts, is a sensible limit on freedom of contract.

But I see no compelling reason why parties should not be able to enter into a contract conferring greater entitlements. And, by operation of law, that's what parties to most employment contracts have impliedly done.

A policy designed to give greater certainty and clarity should satisfy two critical requirements: Firstly, it should not displace any existing contractual rights, so any greater termination clauses (express or implied - including common law reasonable notice) that predate a legislative change should be left intact.  Secondly, it should not make it impossible for employees and employers, if they so choose, to expressly agree to a greater entitlement.

The mechanism to do so would be a statutory provision that merely overrides the common law implication of reasonable notice on a moving forward basis, providing for some other implication instead that is subject to agreements to the contrary. In theory, you could put this alongside the existing (lower) statutory minimum: "Here's an implied default, but you can contract down as low as this other formula, or as much higher as you want". However, that opens up some of the same complexity and confusion as the status quo, and raises a pronounced policy question of why we should set a default entitlement at some different level than a protected minimum.

The status quo does present certain 10,000-foot problems: We have statutory minimums to protect vulnerable employees from employers with substantial bargaining power, but the common law regime, despite being more employee-friendly in general, is least likely to be applied in cases where the bargaining power imbalance is at its greatest: Large and sophisticated employers are more likely to be able to implement effective contractual language to reduce an employee's termination entitlements, whereas smaller employers who are less sophisticated and less financially robust are less likely to be able to protect themselves from the hefty liabilities that can be associated with a termination.

The statutory minimums are very modest, and holding employees to them often seems unjust, which is, in part, why courts will use just about any ambiguity or drafting error in a contract to avoid holding employees to such strict application...but at the end of the day, you're less likely to run into those problems if you're able to pour meaningful amounts of money up front into legal and HR expenses. (Plenty of good lawyer-drafted contracts fall to evolutions in the law; even with a good lawyer, there are ongoing expenses to keeping your contracts up-to-date. That said, there's a bit of a shoddy trend in management-side employment law to 'fight the last war', so to speak, always reacting to express judicial treatments of contractual language, and never really trying to anticipate untested-yet-sound arguments. As a lawyer who practices both sides, I create my precedents to be strong enough that I wouldn't be able to plausibly challenge it. After the Ontario Court of Appeal's Waksdale decision, voiding one termination clause in a contract because of the illegality of a different clause, lots of Ontario management lawyers threw a fit about the courts constantly moving the finish line for enforceability; my response: We've known for years that the statute prohibits that other illegal language, so why are you still using it anyways?)

So, if you consider a scenario of long-service administrative assistants working for a multi-billion dollar company making $1000/wk, they're likely to have contractual language limiting them to their statutory minimum of (say) 8 weeks. So a termination results in $8000 in termination pay and nothing more. However, the same employees working for a small family-owned business, it's more likely that the employee will have entitlements over $50,000, and possibly even exceeding $100,000 - which can be extraordinarily onerous for the employer.

Ontario's statutory regime took a stab at 'means-based' entitlements: They have a similar notice-based formula to Alberta, with an additional severance formula payable to employees with more than 5 years of service if certain triggers are established, like a payroll in excess of $2.5M. A long-service employee's statutory entitlements in Ontario, under this framework (and excluding certain group termination scenarios) can cap out as high as 34 weeks.

Of course, the $2.5M threshold was set in the early 80s, and hasn't changed since, so it means something very different now than it did then. Also, the potentially vast difference in entitlements based on a fairly arbitrary bright line yields unsatisfactory resolutions from a fairness perspective.

There's real appeal, then, to a higher minimum that doubles as an implied default - a minimum with a structure that doesn't generally seem woefully deficient with respect to people's reasonable expectations, but that even unsophisticated employers get to rely upon without necessarily requiring expensive (or sometimes even prescient) legal advice. In cases where employees may have the bargaining power to seek enhanced terms, they can still negotiate it...but no longer would an employee stand by default in an enhanced position protected only by ignorance of vulnerable employers and the difficulty in navigating the legal regime to change that position.

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Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.