Many entrepreneurs begin their commercial journey by opening a franchise. As first-time business owners, navigating the laws that govern employment relationships can be challenging. Often the most challenging aspect is navigating the requirements of legally terminating an employment relationship.
Below, we’ll set out the general principles that franchisees should consider when contemplating employee terminations in Ontario. Whether your franchise location is within Ontario or in another province or territory, sourcing legal advice prior to taking the first steps toward termination is always recommended.
The basics of termination
There is no “at-will” employment in Canada, meaning franchisees cannot terminate employees without reason or notice. Employees are entitled to notice of termination or pay in lieu of notice, unless their employment was terminated “for cause,” or justified for a legitimate, specific reason. Cause, as described below, is an extremely high threshold for an employer to satisfy.
Generally, there are two sources that dictate an employee’s entitlements at termination:
- the applicable employment standards legislation, and
- the employment contract.
Provincial employment standards legislation sets out minimum requirements for notice of termination and/or pay in lieu of such notice, as well as severance pay (if applicable). For example, in Ontario, an employee with three months to one year of service is entitled to one week of notice. Employees with one to three years of service are owed two weeks of notice of termination. Employees with three-plus years of service are entitled to one week of termination notice per year of service, up to a maximum of eight weeks.
The second source of entitlement at the time of termination is the employment contract. The parties can agree in a written contract at the start of employment on what the entitlements will be at the time of termination. The main caveat is that the agreement cannot be for less than what is required by the employment standards legislation—if that happens, the termination language that was agreed to will become void and unenforceable. Where there is no contractual language, or the language is void, a court will assume that the parties intended the employee be provided “reasonable notice” of their termination. This is otherwise known as “common law” reasonable notice.
Common law notice is determined by a court on the basis of past cases with similarly situated employees.
Specifically, a judge considers the employee’s position, years of service, age, salary, and ability to find a comparable job. There is no strict rule, but common law notice is often one month per year of service (which is inclusive of any statutory entitlements). There are notable outliers, such as employees in senior positions and, counter-intuitively, employees with very short service.
Note that when a court is awarding damages for common law reasonable notice, these will be calculated to include all forms of compensation the employee could have received over the notice period, including the value of any base salary, group benefits, bonuses, and allowances.
“Just cause” standard to terminate
In Ontario, there are two “just cause” definitions governing employee terminations with cause.
An employee may be terminated due to willful misconduct, disobedience, or willful neglect of duty that is not condoned by the employer, as defined in the Employment Standards Act. This is a very difficult standard to meet, but where it is met, the terminated employee is not entitled to any termination notice at all. Performance issues or poor behaviour alone almost never satisfy the “for cause” threshold. To rise to the level of cause, an employee’s conduct must be egregious, and the breach must be significant, deliberate, and purposeful (i.e., committing fraud, theft, or workplace violence).
In addition, an employee may be terminated for cause at common law, which has a broader just cause definition and is not as prescriptive as the established standards prescribed in the Employment Standards Act discussed above. The common law threshold is also high, and employees who are terminated for cause at common law must still be provided with their statutory termination notice under the Employment Standards Act. In order to be successful in carrying out a termination for cause, franchisees should have a documented and progressive disciplinary record against the employee (i.e., increasingly severe penalties are enacted against the employee as their misconduct continues, from a verbal warning up to a suspension). In determining the existence of cause at common law, courts consider various factors including the employee’s seniority, role, and performance, as well as the nature of the franchisee’s business, relevant policies, and the level of trust in the employee. Courts also assess whether the misconduct can be resolved within the employment relationship or if it is sufficiently severe enough to cause a breakdown in the employment relationship.
Where an employer unsuccessfully asserts termination cause (under either the statutory or common law definitions), it becomes liable to pay the employee’s common law reasonable notice entitlement.
Takeaway for franchisees
When establishing their franchised businesses, franchisees should consult with their counsel and invest the time to prepare compliant and appropriate employment contracts and policies for their staff; neglecting to do so may have significant consequences. It is exceedingly important for employers to get it right when drafting termination provisions in employment contracts. If the termination provision is drafted correctly, franchisees can limit employee termination entitlements at common law to statutory minimums. If it is not drafted correctly, the employer can become liable for the larger common law termination amounts. Similarly, franchisees should exercise caution when taking a just cause position during an employee’s termination, as failure to meet the relevant definitions of cause can also result in significant exposure.
Fatimah Khan
Associate
Dentons Canada LLP
fatimah.khan@dentons.com