Reduce, Reconsider, Restore: Court of Appeal Strikes Down Reduction of Notice Period Due to Economic Circumstances of Employer

Notwithstanding the best wishes of employers, there are times when employees have to be let go for purely financial reasons.  In particularly dire circumstances, these dismissals can often be an important part of cost cutting to ensure that a company remains a viable ongoing concern.  However, a recent matter heard by the Ontario Court of Appeal clarified that an employer’s financial circumstances do not alter the reasonable notice to which an employee is due.

The Trial Decision

Michela v St. Thomas of Villanova Catholic School was a wrongful dismissal case involving three plaintiff employees, all of whom had formerly been teachers at the defendant private school.  Due to economic conditions, all three had been informed prior to the beginning of a new school year that their term contracts were not being renewed.

The plaintiffs had been employed for 8, 11 and 13 years respectively at the time of their terminations.  As a result, notwithstanding that the contracts purported to be for a fixed annual term, the trial judge concluded that their employment had, in fact, been one of indefinite duration.  As a result, the plaintiffs were entitled to reasonable notice.  The defendant did not appeal this aspect of the decision.

The plaintiffs had each requested twelve (12) months’ notice.  While the trial judge agreed that this was the appropriate starting point for the determination, the trial judge also pointed to the financial difficulty of the employer as being a relevant factor.  The trial judge found that the effect of the long notice period would be to defeat the ability of the defendant to reduce its prospective deficit, in essence negating the cost savings of the terminations for the employer.  In addition, the trial judge found that the employees ought to have been aware of the need for the employer to reduce its cost, and that this knowledge was part of the circumstances of their employment.

As a result of these considerations, the trial judge reduced the notice period by half, awarding each employee six (6) months’ notice.

The Appeal

The plaintiffs appealed the trial judge’s decision to reduce the reasonable notice to which they were entitled, arguing that the financial circumstances of the employer were an irrelevant factor in determining the reasonable notice to which they were entitled.

The Court of Appeal agreed.

The Court of Appeal held that it has never been true that an employer’s economic circumstances justify a reduction in the notice period.  In fact, what is important is the circumstances of the employee, and that an employer’s perspective is immaterial to the determination of reasonable notice.

The Court of Appeal rejected the trial judge’s finding that the “character of the employment,” an important factor in determining the appropriate quantum of notice, included an understanding that the jobs of the plaintiffs were not as secure as other employment may have been.  The Court of Appeal clarified that the relevant character of the employment is defined only by the circumstances of the individual employee, rather than the employer.  The employer’s circumstances are irrelevant to that determination.

The Court of Appeal rejected the interpretation of the trial judge of an old decision which appeared to support the trial judge’s ruling.  The Court of Appeal held that in fact, what that earlier decision warned against was an extension of the notice period where the general economic climate made it difficult for a dismissed employee to secure new employment.  That decision did not provide for a reduction in the notice period due to the economic conditions of the employer.

As a result, the Court of Appeal restored the twelve (12) month notice period and invalidated the reduction applied by the trial judge for the employer’s economic circumstances.

What Employers Need to Know

While trying economic circumstances often mean that the size of the workforce must be reduced, those circumstances do not reduce the liability they face with respect to their departing employees.  As a result, employers cutting their costs by dismissing employees must be careful to accurately assess the true liability they face in so doing.

Another important factor to consider is the Court of Appeal’s more sweeping and broad dicta that the factors affecting reasonable notice are concerned with the position of the employee rather than the employer.  The Court of Appeal held that this is true for all of the factors used in determining reasonable notice.  As a result, smaller organizations and non-profits may face the same liability as larger multinational corporations, since the analysis of reasonable notice is from the position of the employee, rather than the employer.  This is despite the fact that the impact of a reasonable notice award may be of significantly greater impact to a smaller organization.

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