Termination Pay in the Contract for Employment

In Ontario, and in most Canadian jurisdictions, the law allows an employer to end a contract of employment, and to thereby terminate an employee, at any time. If the termination is for cause, then you had better be ready to prove it. If the termination is without cause, then the law requires you to provide notice of the dismissal to the employee – and that’s the subject of this blog.

There are two options for notice of dismissal – the first is known as working notice. With working notice you inform the employee that you’re letting them go, then you allow them to continue to work (or to collect a paycheque anyway) for a period of time that can be calculated based on a handful of factors, including, most importantly, the employee’s length of service. This is a great option for the fantasy scenario where you know in advance what your work requirements are and the fantasy employee will continue to earn their paycheque right up until the last day.

In reality however, the reason that most employers dismiss an employee is because they want them out of the workplace immediately. That is where the second form of notice comes in; it is referred to as pay-in-lieu of reasonable notice. In this scenario, an employee is paid, either in lump sum, or in installments, an amount equivalent to their pay for the duration of the above-mentioned notice period. It is not uncommon for an employer to be faced with the obligation of paying a long-standing, though ill-performing, employee for an equivalent of a month or more, for every year of the employee’s service – and if the employee disputes your calculation of their entitlement, add legal fees to the payout…

These are the two unpleasant options that every employer who doesn’t plan for the inevitable has to choose from when faced with the already daunting task of having to dismiss an employee.

A third alternative, and one we recommend to clients wherever practicable, is to draft a contract for employment that includes a fair and reasonable limitation on the notice period that the employee will be entitled to on dismissal. This option provides clarity to both the employee and the employer and it provides an unambiguous dollar value to the dismissal entitlement. This allows the employer to weigh the real cost of dismissal. Perhaps most importantly, if done properly, a notice limitation eliminates the need for litigation.

A properly drafted contract, including an explicit clause outlining an employee’s dismissal entitlement will almost certainly save you the legal fees involved in drafting it – every time you use it. If you are an employer who values certainty, please contact us about drafting the contract that all of your new employees should be signing.

Scott R. Young