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Mergers and Acquisitions in Canada


Employment Agreements

Employees may be employed under a written employment agreement, an oral employment agreement or a collective agreement.

In the unionized workplace, all employees in the bargaining unit are employed under the collective agreement, which is signed by the employer and the union. The Supreme Court of Canada has held that there is no room for individual negotiation or employment agreements in the unionized setting and that the collective agreement is the only employment agreement, with the union being the sole bargaining representative of the employees in the bargaining unit.

In the non-union workforce, employees are employed under a written or unwritten employment agreement. In Canada, written employment agreements are still relatively rare, especially in the lower ranks, although increasing in popularity. Any employees without a written employment agreement have, an oral employment agreement. It is for this reason that this section refers, from time to time, to the employment agreements of employees, even where there is no written document. Where there is no written term regarding termination of employment, it is an implied term of employment that employment will only be terminated for cause or upon reasonable notice.

Termination of Employment

Canadian severance laws are quite generous and there is no employment at will. It is important for the buyer of a corporation to understand the potential costs of a future reduction in the workforce, the scope of possible outstanding severance claims for dismissals that occurred before the acquisition date, and whether and how those obligations can be limited.

Regardless of where the target business is located, there are two levels of severance obligations to be assessed: statutory and common law (civil law in the province of Quebec).

Statutory Requirements

Each province and territory in Canada has local legislation which sets out the minimum notice period to be provided in the event of a termination of employment other than for just cause (which has a fairly narrow statutory definition). These amounts are fairly modest and are based on an employee’s length of service. They generally range from one week to eight weeks of notice of termination, which can be provided as time worked (after receiving written termination notice) or as pay in lieu of notice if the termination is to be immediate. It is not possible to contract out of or waive these statutory requirements, even with the consent of the employee.

The statutory notice requirements increase significantly where group dismissals occur. Most provinces define a mass dismissal as the termination of 50 or more employees within a specified time frame. However, in some provinces, it is as low as 10 dismissals. The notice required in these situations can be as great as 18 weeks. There are often additional requirements, such as notifying the provincial Ministry of Labour of the impending terminations, posting notices in the workplace or assisting employees in securing new employment.

The Province of Ontario and the federal jurisdiction require payment of statutory severance pay in addition to notice of termination. The federal Canada Labour Code [[(RSC 1985, c L-2).]] (the “Code”) applies only to federally regulated employers including airlines, banks, broadcasters, and those involved in telecommunications or interprovincial shipping, trucking and railroads. Most businesses are regulated by the laws of the province in which they operate. Fortunately, provincial employment legislation is fairly consistent across the country.

Unlike termination notice (which can be provided as time worked or as pay in lieu of notice of termination), statutory severance pay is always a cash payment. Ontario’s severance pay requirements apply only to employees with at least five years of service and only to employers with an annual Ontario payroll of at least CDN$2.5 million, although a recent Ontario court decision has held that the employer’s total Canadian payroll must be at least CDN$2.5 million, so the law in Ontario on the payroll threshold is currently unsettled. The severance formula is one week of pay per year of service, to a maximum of 26 weeks. Severance pay under the Code is the greater of five days’ pay or two days of pay per year of service, and is only payable to those who have completed 12 months of continuous service with the employer.

A very small number of jurisdictions (namely Quebec, Nova Scotia and the federally regulated sector) have legislation requiring just cause for the dismissal of employees with a certain amount of seniority. The federal rule does not apply where the termination is a result of lack of work or the discontinuance of a function. In these jurisdictions, government tribunals have the power to award damages or reinstate employees dismissed without cause.

Common Law And Civil Law Requirements

Of far more significance than the modest statutory termination requirements are the Canadian common law and the Quebec civil law requirements.

Where an employee is dismissed for cause, there is no advance notice of termination or severance pay required whatsoever. Not surprisingly, “cause” has been narrowly defined by our courts as certain acts including fraud, dishonesty, gross incompetence, serious sexual harassment, conflict of interest, theft and sometimes serious insubordination. All other terminations of employment, including a redundancy or downsizing, are terminations without cause and the amount of notice of termination required under the contract of employment must be given.

If there is no express termination provision in the employment contract, the courts imply an obligation to provide reasonable notice. Reasonable notice is determined on the basis of a number of factors such as the individual employee’s length of service, position, age and compensation and the availability of similar employment. A civil claim for severance where there was no cause for the dismissal, is known in Canada as a wrongful dismissal claim (although there is no connotation of any wrongful activity. It is “wrongful” only to the extent that insufficient notice was given). “Reasonable notice” at common law or civil law may be very generous and, when making an estimate of severance costs, one month per year of service provides a rough guideline, although it is not entirely reliable as each case is fact specific. Reasonable notice generally does not exceed 24 months in total, absent exceptional circumstances.

Where an employee has signed an employment agreement which contains notice or severance terms, the contractual terms are generally binding. Courts will refuse to uphold severance provisions which provide less than the provincial legislation or where the employee received no consideration for signing the employment agreement (for example, employment had already commenced before the contract was signed). In some cases, the courts may also refuse to enforce an employment agreement where: the contract was unconscionable; the employee was coerced into signing it; the employee did not understand the contract; or, where the contact was signed so many years earlier that, with subsequent changes in function, position or size of the company, the contract is no longer relevant. In the event the employment agreement or termination provisions are not enforceable, the court will imply an obligation to provide reasonable notice. 

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