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Session EF1
Terminations Roundtable
(double session)
Presented by:
David Whitten, Whitten
& Lublin, LLP & Annie Chong,
Thomson Reuters
Termination
Presented by: Annie Chong
Thomson Reuters
Agenda
Reasons for termination
Canada Labour Code (CLC)
Employment/Labour Standards
Required notice (Individual)
Wages in lieu of notice (Federal versus Québec)
Severance pay
Retiring Allowance
Salary Continuance
Record of Employment (ROE)
Legal fees/Counselling fees
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Reasons for Termination
The termination requirements are different depending on who initiates the termination.
Employee Initiated
• when an employee initiates the termination it means they have resigned (e.g., other job
opportunities, normal course of events);
• some jurisdictions require the employee’s written notice of termination (e.g., Manitoba – 1 week
(less than 1 year) & 2 weeks (1 year or more);
• retirement is another example of a normal course of event, perhaps the employee has decided to
take early retirement; or
• the employee’s contract may provide an end date.
Employer Initiated
• an employer must have valid reasons for employee termination (i.e., restructuring, shortage of
work, performance issues etc);
• a minimum standards exist under each employment/labour standards across Canada to which an
employer must follow; and
• always consider back-up to support the reasons of the termination (document, document, and
document).
Canada Labour Code
Employers under the federal jurisdiction abide by the Canada Labour Code
requirements and are not subject to provincial/territorial standards.
Employers that operate international services such as:
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banks;
highway transport;
telephone, telegraph and cable systems;
pipelines;
canals;
ferries, terminals and bridges;
shipping;
radio and television broadcasting;
airlines;
railways.
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Employment/Labour Standards
•
Employment/Labour Standards is a branch of the Ministry of Labour which establishes
legislation and governs the minimum standard to be followed by employers for the
protection of employees;
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Each province/territory has enacted legislation regarding the minimum amount of notice an
employer must give to an employee;
•
The period of notice due will depend on where the employee works and how long the
employee has been employed with the company.
•
The employer can either:
- have the employee work the notice period, or
- pay the employee wages in lieu of notice.
•
Provisions of a union contract or company policy that provides better will take precedence
over the employment/labour standards’ legislation.
Required Notice - Individual
•
When providing an employee with notice of termination, the notice should be in writing and
delivered either in person or by registered mail. Where the employer is unable to, or
chooses not to, provide the notice period, the employee must be paid wages in lieu of
notice for the required period of notice;
•
Where an employee serves the notice period, the employer must not alter the employee’s
rate of wage or any other term or condition of employment;
•
If the employee is paid a lump sum representing wages in lieu of notice instead of serving
the notice period, the employee must receive the wages he or she would have earned,
exclusive of overtime, had the employee worked the notice period;
•
Wages paid to an employee who works the notice period are subject to regular statutory
deductions for C/QPP, EI, QPIP and income tax and these monies are reported on a T4 in
box (14) and on the RL-1 in box (A).
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Wages in Lieu of Notice
Canada Revenue Agency (CRA)
•
Wages in lieu of notice is considered employment income and subject to Canada Pension Plan (CPP)
contributions, Employment Insurance (EI) premiums and income tax deduction (using the bonus tax method);
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These wages are reported in box (14) of the T4 slip.
Revenu Québec (RQ)
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Employees covered by the Quebec Act respecting labour standards, in receipt of money paid in lieu of notice of
termination are deemed to be in receipt of a “compensatory indemnity”, which is a retiring allowance;
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This money is not subject to Quebec Pension Plan (QPP) contributions, but they are insurable under QPIP
because they are subject to EI premiums. The payments are also subject to income tax deduction (using the
lump sum tax rates).
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For employer contributions, the indemnities are also included for the Contributions to the financing of la
Commission des normed du travail (CNT) tax levy;
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These monies are reported in box (O) of the RL-1 with a footnote code (RJ).
Severance Pay
•
In addition to the required notice of termination (or wages in lieu of notice), an employee may also
be entitled to severance pay;
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Unlike notice requirements, which relate to a period of employment. Severance payments are
based on an employee’s years of service with the employer;
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Severance is a term that is often used to describe gratuitous payments over and above the
legislated pay in lieu of notice;
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Some companies, whether required by Employment Standards or not, may choose to pay their
terminated employee severance pay;
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Severance pay qualifies as a retiring allowance and may be transferred, tax free, to an
Registered Pension Plan (RPP) or a Registered Retirement Savings Plan (RRSP);
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There are two jurisdictions that legislates severance requirements, the Ontario Employment
Standards Act, 2000 and for those who are federally regulated and fall under the Canada Labour
Code Part III if certain conditions are met.
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Severance Pay – CLC
Canada Labour Code Part III:
Under the Canada Labour Code, employees’ who have completed 12 consecutive months of
continuous service and who are terminated by the employer must receive the following
severance pay:
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two days’ wages at their regular rate for regular hours of work (i.e., excluding overtime)
for each completed year of employment that is within the term of the employee’s
continuous employment or
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five days’ wages at their regular rate of regular hours of work (i.e., excluding overtime)
Whichever is greater.
Severance Pay - Ontario
Ontario Employment Standards Act, 2000:
Under Ontario’s ESA, 2000, severance is payable to:
- employees with five or more years of service; and
- the employer has a total annual Ontario payroll of 2.5 million or more.
Severance pay is calculated at one week of regular wages, exclusive of
overtime) multiplied by:
- the number of completed years of employment; and
- the number of completed months in a partial year divided by 12.
The maximum amount of severance pay is 26 weeks.
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Severance Pay cont’d
Severance pay is not pensionable or insurable, but it is taxable. Tax is deducted using the
lump-sum tax rates.
All provinces except Quebec
• 10% ($5,000.00 or less)
• 20% ($5,000.01 to $15,000.00)
• 30% ($15,000.01 or more)
Quebec Federal
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5% ($5,000.00 or less)
• 10% ($5,000.01 to $15,000.00)
• 15% ($15,000.01 or more)
Quebec Provincial
• 16% ($5,000.00 or less)
• 20% ($5,000.01 or more)
Severance Pay cont’d
Note: the lump sum tax rates are only estimates. Therefore, a possible tax liability could result when
the employee files their personal income tax return (T1) at the end of the year.
Severance pay qualifies as a retiring allowance and may be transferred tax-free, to an
RPP or an RRSP.
Severance pay is reported in the “Other Information” area on a T4 using the following codes :
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code 66 (eligible retiring allowance);
code 67 (non-eligible retiring allowance);
code 68 (eligible retiring allowance for Indians with tax-exempt income); and
code 69 (non-eligible retiring allowance for Indians with tax-exempt income).
Do not report severance pay in box (14) on the T4
For Quebec, severance pay is reported in box (O) of the RL-1. In the RL-1 code box (Case O),
enter code RJ.
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Retiring Allowance
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A retiring allowance is a sum of money paid, on or after termination of employment, in recognition of long
service or compensation for the loss of office or employment;
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Payment can only be classified as a retiring allowance if there is no longer an employer/employee
relationship;
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A retiring allowance is usually a single payment, however, it may be paid in installments and still qualify;
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Retiring allowances are not subject to C/QPP contributions , EI or QPIP (in Quebec) premiums;
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The amounts are subject to income tax, using the lump-sum tax rates, unless the employee transfers the
retiring allowance tax-free to a registered pension plan (RPP) or to a registered retirement savings plan
(RRSP);
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If paid by installments, to determine the tax rate to use, you must look at the entire amount of the retiring
allowance to be paid in the calendar year;
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Circumstances may occur where an individual receives a retiring allowance in installments that
span over two or more calendar years.
Retiring Allowance cont’d
Payments that qualify:
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severance pay;
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unused accumulated sick pay credits (paid on termination);
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in recognition of long service;
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loss of office/compensation;
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“excess” wage in lieu of notice;
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in/out of court settlement;
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Retiring Allowance cont’d
Payments that do not qualify:
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regular salary;
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banked overtime pay;
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bonuses;
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car allowance;
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commissions;
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vacation pay;
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legislated pay in lieu of notice (except Québec).
Retiring Allowance cont’d
The amount of a retiring allowance that an employee may transfer, tax-free, to a
registered pension plan or to an registered retirement savings plan is calculated at:
a)
$2,000 for each calendar year (or part year) of employment up to and including
December 31, 1995; plus
b)
$1,500 for each calendar year (or part year) of employment up to and including
December 31, 1988 that the employee:
i)
did not belong to a company pension plan, pension fund or deferred
profit-sharing plan
or
i)
belonged to a plan, but the employer’s portion was not vested in the
employee when you paid the retiring allowance. The $1,500 amount
can be prorated according to the percentage of vesting.
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Retiring Allowance cont’d
Example: An employee, hired September, 1987, was terminated April 2013. During his first
two years of employment, he did not belong to the pension plan. In his third year, he joined the
plan. At the point of termination, he had participated in the company’s pension plan for a total
of 25 years during which time the employer’s portion had vested in him at 100%.
The employee received a retiring allowance of $70,000 upon termination.
Total amount eligible for transfer to an RRSP is:
$2,000 x 9 years (1987 to 1995)
$1,500 x 2 years (1987 to 1988)
Total amount eligible for transfer:
= $ 18,000.00
= $ 3,000.00
= $ 21,000.00
Retiring allowance:
Eligible portion
Non-eligible portion
= $ 70,000.00
= $ 21,000.00
= $ 49,000.00
Retiring Allowance Cont’d
From the previous example, the employee has requested to have only $10,000 transferred to his RRSP and the
balance of $60,000 paid out.
Retiring allowance:
Amount transferred to RRSP
Amount taxable
= $ 70,000.00
= $ 10,000.00 (no tax)
= $ 60,000.00 x 30% = $18,000.00
Year End Reporting:
code 66 – eligible portion
code 67 – non-eligible portion
$21,000.00
$49,000.00
Equal the total retiring allowance
$70,000.00 (Do not report in box 14)
For the province of Quebec, report the entire amount of $70,000 in box (O) of the RL-1. In the code box (case
O), enter code RJ.
Note:
The year end reporting requirements have no bearing on what the employees transfers
or not transfers.
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Retiring Allowance cont’d
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In order for the amount transferred to be tax-free, the employer must transfer the money
directly to the financial institution on the employee’s behalf;
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Upon request from the employee, employers are permitted to transfer the non-eligible
portion of a retiring allowance tax-free to his/her RRSP or a spousal or common-law
partner’s RRSP provided the amount being transferred does not exceed the “employee’s”
RRSP deduction limit;
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The Canada Revenue Agency (CRA) considers that the employer has “reasonable
grounds” to believe the employee can deduct the contribution by confirming with the
employee in writing that the contribution can be deducted for the year, or get a copy of their
notice of assessment (T1).
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Salary Continuance
A “salary continuance” occurs when the employment relationship between the employee and
employer continues to exist after the employee’s employment is considered terminated.
– the employment relationship still exists;
– the employment is not severed;
– first indicator is that the company pension is being maintained which means the
employee is entitled to accrue pensionable service under the company Registered
Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP);
– if there is no RPP/DPSP in place or the employee was never a member of the
company’s RPP/DPSP then look at the group benefits (e.g., medical, dental, etc) being
offered;
– if all of the employee’s benefits are maintained, a salary continuance situation may
exist;
– this individual is a ghost employee; if everything is maintained except the only
difference is the employee is not physically reporting to work.
Salary Continuance cont’d
Salary continuance payments are considered regular employment income;
They are subject to Canada/Quebec Pension Plan (C/QPP), Employment Insurance (EI)
Quebec Parental Insurance Plan (QPIP) and income tax deductions at source;
These monies are reported on a T4 slip, in box (14) “Employment Income” and on the RL-1
slip, in box (A), Employment income before source deductions;
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Record of Employment (ROE)
Another important requirement for payroll is to issue a Record of Employment (ROE) when an employee
stops working and has an interruption of earnings;
Employers use the form to report the employee’s insurable earnings and hours with the employer;
Service Canada uses the information on the ROE to determine whether a person qualifies for Employment
Insurance (EI) benefits;
Employers may complete and issue a paper version of the ROE or use an electronic version (ROE Web);
An interruption of earnings occurs when:
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an employee has had or is expected to have seven consecutive calendar days during which he or she
does not work and does not receive insurable earnings from the employer;
an employee stops working because of illness, injury, quarantine, pregnancy, parental or compassionate
care leave and his or her insurable earnings (e.g., unpaid sick leave) falls below 60% of his or her normal
weekly insurable earnings;
An employee begins to receive wage-loss insurance payments;
Some exceptions apply.
Legal/Counselling Fees
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Often, as part of the final settlement, the employer will pay the former employee’s legal fees
directly to the lawyer, in this case there is no requirement to report legal fees or to withhold
taxes;
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If you reimburse the employee for the legal fees (no receipt) this should be reported as
income however, no income tax deduction is required. The legal fees are tax deductible
when the employee files his or her personal income tax (T1) return.
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Employer paid counselling fees are not considered a taxable benefit if it is related to reemployment counselling or job replacement counselling for employees whose employment
are being terminated.
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Termination
Thank you all for participating in our
session today! ☺
Q & A period….
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Terminations:
Managing the Legal Risk
David A. Whitten
Whitten & Lublin, Employment Lawyers, Toronto, Ontario
Pre-termination Considerations
Human Rights
Age, family status, disability, race/ancestry, marital
status
Protected leave
Family medical, pregnancy, parental, personal
emergency, reservist
Temporary Lay-off
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Human Rights
Provincial and Federal
Freedom from discrimination on enumerated grounds
Duty to accommodate
Undue hardship
Frustration of Contract
Protected Leaves
Pregnancy/Parental
Family medical
Personal emergency
Rights during leave
Reinstatement
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Statutory Leaves of Absence cont.
Continued Contributions to Certain Benefits
Not Required to Pay Wages
Obligation to Reinstate
Same Salary (with scheduled increases)
Same Position OR Comparable Position
Statutory Leaves of Absence cont.
Failure to Reinstate
Claim Pursuant to Provincial Employment
Standards Legislation (Ministry of Labour)
$10,000 Limit Does Not Apply (ON)
Breach of Human Rights Legislation
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Reasonable Notice
Statutory – termination and severance pay
Employment agreement
Consideration
Enforceable
Clear and unambiguous
Common law – age, years of service and position
Common Law
Age, years of service and position
Inducement/Recruitment
Previous service - successor employer
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Severance Package
Benefits
Total compensation
Policy Language
“Active employment”
Structuring Packages
Working notice or pay in lieu
Compensation continuance versus lump-sum
Benefits
Post-employment obligations – Mason v. Chem-Trend
(2011) OCA
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Mitigation
Dismissed Employee’s Obligation to Mitigate Damages
Possible Impact on Wrongful Dismissal Damages
Lump Sum Payment
Salary Continuance
o
Settlement Agreement Must Be Clear
o
Reporting Measures Imposed
No Impact on Statutory Termination & Severance Pay
Evans v. Teamsters [2008] SCC
Retiring Allowances
Income Tax Act - Deemed Retiring Allowance
Adjusted Taxation Rate, RRSP Contributions and Legal Fees
Conditions:
Employment Relationship Must Cease to Exist
Statutory Termination Pay ≠ Retiring Allowance
Severance Compensating For Loss of Employment
= Retiring Allowance
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Additional Damages
Mental distress and mental suffering
Human rights
Disability claims
Honda v. Keays [2008] SCC
Releases
Always get one if you are going to pay more than
the statutory minimum!
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DAVID WHITTEN
[email protected]
Whitten & Lublin
141 Adelaide Street W., Suite 600
Toronto, ON, M5H 3L5
www.canadaemploymentlawyer.com
www.toronto-employmentlawyer.com
blog.toronto-employmentlawyer.com
Tel.: 416.640.2667 Fax: 416.644.5198
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