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Is it Time to Abolish “Reasonable Notice” in Employment Contracts?

A new App that calculates how much  ”reasonable notice” a court would order in a wrongful dismissal lawsuit raises questions (again–I’ve discussed this issue before) about why we maintain two systems of legal rules governing notice of termination of employment contracts.

The App, called Severance Calculator, was created by a Toronto lawyer at the firm of Samfiru Tumarkin LLP.  By plugging in a few basic facts, the App produces a range of notice a judge would probably order.  For example, I tried this scenario:

Employee with 8-11 years service, between the age of 41-50, working in Sales.  The App tells me that person would be entitled to between 9-12 month’s “compensation” if a court were asked to decide the period of notice in a wrongful dismissal lawsuit.

contractIf it is that simple and predictable to calculate the amount of ‘severance’ required to terminate an employment contract, then why do we still use a system that requires lengthy, costly lawsuits to get to the point where a judge orders this predictable amount?  Why not just amend the Employment Standards Act to require notice period approximating the range judges will order in a lawsuit, and thereby eliminate the need for most wrongful dismissal lawsuits?

That’s a good question.  First some background.

A Primer on the Intersection of Contract and ESA Notice of Termination Rules

We have two systems of legal rules that govern termination of employees in Canada.  One is the common law of the employment contract.  In this model, the amount of notice an employer must give an employee at termination is determined by the contract, which is usually drafted by the employer.  If the contract has a term saying how much notice must be given, then that contract term governs.  When the contract does not include a term specifying the notice period, the courts “imply” a term requiring “reasonable notice”.   Courts decide how much notice is “reasonable” by considering a range of well known factors originally set out in a 1960 case called Bardal v. Globe & Mail.  Of those factors, length of service, character of the employment, and age of the employee are usually given greatest weight.  That’s why these factors appear in the Severance App.  Reasonable notice can range from 1 to 24 months (or more), though the outer limits of this range are awarded only rarely.

The second system of legal rules is employment standards legislation.  In the late 1960s and early 1970s, Canadian governments introduced the concept of statutory notice of termination.  An example is Ontario’s ESA, which in Section 54 says that no employer can terminate an employee with at least 3 month’s service without providing them with either working notice or pay in lieu of notice. The amount of notice is then described in Section 57.  It rises with years of service until it maxes out at 8 weeks after 8 years’ service.  The ESA notice requirements represent the minimum amount of notice that can be included in an employment contract.   A contract term that provides for less notice than the ESA minimum is void, and the implied term requiring “reasonable notice” is substituted.

The contractual “reasonable notice” damages are subject to a duty to mitigate [the employee must actively look for work and if that search is successful, the new earnings may be deducted from the damages].  Statutory notice pay is not subject to a duty to mitigate.

Do We Need Two Overlapping Systems

Assume that an employee is entitled to 9-12 months’ reasonable notice under his employment contract.  However, the employer provides him with just 10 weeks notice when he is fired.  The 10 weeks’ notice is more than required by the ESA, so the employer has not violated the ESA.  But the employer has violated the contractual requirement to provide reasonable notice.

In order to recover the damages owed because of the breach of the contract, the 9-12 months’ wages, the employee needs to launch an expensive, stressful, and time-consuming wrongful dismissal lawsuit.  Usually the employee would hire a lawyer, whose fees will be taken from out of the damages ultimately ordered by the court.  The employer too will hire a lawyer, so it will end up paying both the additional damages for the breach of contract and its own lawyers fees, plus a portion of the employee’s lawyers fees. Both employee and employer spend days in discoveries and litigation, which hurts economic productivity. Who wins from this scenario?  I mean other than the lawyers, of course.

An alternative scenario would eliminate the implied common law “reasonable notice” term, and effectively merge the two systems of notice of termination into one under the ESA.   The ESA could explicitly state that the implied notice term is gone and that notice of termination is now governed by the ESA, subject to an expressed higher period of notice in writing in an employment contract.

The new App demonstrates what lawyers know: it’s relatively straightforward in the vast majority of cases to predict what “reasonable notice” will be if litigated.  We could avoid the unnecessary cost of litigation by simply raising the ESA notice period to roughly coincide with that range.  Since both employers and employees are saving the costs of litigation, the new ESA notice period could be fixed at the lower end of the range.  The ESA notice periods could be reduced as well to account for the fact that there’s no duty to mitigate under the ESA.  The ESA model could continue to use length of service as a proxy, rather than try to account for character of employment and employee age.

In short, we could easily devise a statutory model that eliminates the need for almost all court room litigation over notice periods.  This could be achieved by raising the ESA notice periods to a level closer to the lower range of the common law period of ‘reasonable notice’.  For example, in the current model, an employee who is entitled to between 9-12 month’s “reasonable notice” damages for breach of contract but who receives only 10 weeks notice has an incentive to sue to recover the difference.  No one wins from that litigation.  But if the ESA notice period was, say, 5 or 6 months for a 9-12 month employee (rather than just 8 weeks), there’d be no need to litigate.  Employers and Employees could still bargain up from the ESA notice period, but in the vast majority of cases, the ESA notice period would just become the de facto contractual notice period.

Issues for Discussion

What do you think of the proposed model?

In the current system, an employer can avoid the requirement to give the longer periods of ‘reasonable notice’ by including an expressed contract term requiring only the ESA minimum notice.  The alternative model would eliminate the much higher ceiling of ‘reasonable notice’, but would also raise the floor of notice substantially.  Therefore, Employers no doubt would object to the proposal.  Do you agree with this objection?

Do you think the current model benefits one party to the employment contract over the other?  What about the new proposed model?

If you are an employee advocate, can you see any risks in trading the implied “reasonable notice” term for a longer period of statutory notice of termination?

 

 

 

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7 Responses to Is it Time to Abolish “Reasonable Notice” in Employment Contracts?

  1. Andres Reply

    November 19, 2013 at 6:55 pm

    Hello David, what you propose definitely makes sense. But I think where it potentially fails in one area is by creating a system where employees cannot afford to litigate for their entitlements when those entitlements are denied. Take the example of a long-service employee who is terminated without notice for a tenuous allegation of just cause. If they are only entitled to the ESA minimums under their contract, they often cannot afford to litigate the matter. The usual process is to file a complaint with the applicable Employment Standards branch and hope the employer coughs up some settlement money. If the employer doesn’t relent, and the litigation is actually somewhat complicated, the employee doesn’t stand a chance on their own but have no hope of hiring an advocate who will cost them much less than what they may potentially receive.

    Should that same employee be entitled to reasonable notice of their termination, they are looking at enough in damages that there is real incentive to hire a lawyer (and it also increases the employer’s appetite for settlement given the higher stakes and increased litigation costs).

    Under the method you propose I think they would need to tweak the service model within the applicable ministries to ensure employees have access to some form of low-cost advocacy (for example, in BC the Ministry of Labour provides free services through the Workers’ Advisors’ Office).

    • Doorey Reply

      November 19, 2013 at 7:55 pm

      Thanks Andres. I understand your point. A couple of responses. It’s easier, cheaper, and usually quicker to litigate the cause issue before a tribunal then a court, so the legal costs incurred by both sides would usually be less, perhaps substantially so. There is no discovery process, and the employee may even opt to go without a lawyer. So the amount of money going to legal costs should be lower in the ESA model, leaving more for the employee. Also, the test of ‘wilful’ disobedience in the ESA is (usually) harder for an employer to meet than the test for summary dismissal in the common law, so the number of questionable allegations of cause may decline. Then there’s the question of mitigation. If the rules are left as is, then the ESA notice wouldn’t be subject to mitigation, which could result in occasional windfall benefits for employees who can get new jobs quickly. Finally, in practice, only a very small percentage of employees ever pursue wrongful dismissal actions in any event. Some portion of those people may be made worse off under the proposal, but overall a move to greater reliance on the ESA would benefit way more people, because the vast majority of workers, especially low income workers, never pay any attention to their common law, contractual rights. It’s far to costly for them to access court room justice.

  2. Sean Bawden Reply

    November 20, 2013 at 2:08 am

    Prof. Doorey:

    I read this post with great interest. As an advocate who works in employment law representing both employers and employees I can see the utility and potential costs savings of a fixed amount of notice (and I presume severance – recalling that severance, where applicable, just gets subsumed into reasonable notice in any event.)

    However, where I have concerns is with the one-size-fits-all approach. There are a number of variables in wrongful dismissal cases that need to be taken into account and while it may appear easy in a straightforward case to calculate the notice period, how many cases are actually straightforward?

    What is missing from the app and from your model is the older employee, or the effect of inducement, or the employee returning from maternity leave who gets fired. All of those individual cases would be missed by a set amount of notice and that gives me pause.

    I agree that smart counsel can usually predict reasonable notice within a range. When both sides use diligent counsel, then yes the case may never see the inside of a courtroom. Costs can also be a lot lower than some may thing – especially when both sides choose to be pragmatic.

    So, while I see the merit in revisiting the ESA, I am not sure a one-size-fits-all approach is the answer.

  3. Dan McGarry Reply

    November 21, 2013 at 6:56 pm

    I agree with Sean. Removing age as a compensable factor is not something that I would advocate.

    Furthermore, as a product of the legislative process the ESA is prone to being amended according to the prevalent political power.

  4. Don Jordan Reply

    November 22, 2013 at 4:52 pm

    I applaud the notion that we should eliminate the strife and heartache for both employers and employees which comes with litigation of wrongful dismissal claims by providing higher statutory minimums. However , one matter needs to be addressed. If you increase the statutory entitlements to within a reasonable margin of what counsel may “guess” a court will award (and it is no more than a predictive “guess”)but maintain the position that there is no duty to mitigate then you change the system from one which is based on what would be reasonable notice to one where an employees’ service becomes “capitalized labour” with an entitlement to a fixed return on that capital. Thus ,any set statutory entitlements must also reflect the reality that the vast majority of terminated employees find replacement employment within the “reasonable notice period”. This reality is, in part,an explanation for the few cases (relative to the number of terminations) which are litigated.

  5. Doorey Reply

    November 26, 2013 at 7:12 pm

    Thanks Don, I think introducing a duty to mitigate into the ESA, of some sort, in association with raising the ESA notice periods to an approximation of the low end of reasonable notice would be a fair and sensible tradeoff. An obvious downside of that approach would be a higher volume of ESA litigation over mitigation issues. However, overall, the new ESA model would decrease civil wrongful dismissal actions, uncertainty, and legal costs for employers, and most employees, especially lower level employees who are most vulnerable, would benefit by a greater base period of notice to look for alternative work.

  6. John Reply

    February 20, 2014 at 5:54 am

    Abolish implied reasonable notice, increase the ESA notice period to approximate what happens now with wrongful dismissal actions so the whole thing is revenue neutral and stop wasting huge amounts of money on legal fees in cases that almost never have enough money at issue to justify a Superior Court action.

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