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COVID-19 Termination: What Severance is Required?

April 7, 2020

COVID-19 Termination Employment

Author: Matthew Bobawsky

Although the federal government is stepping in to provide employees much-needed income support through EI, Canada Emergency Response Benefit (CERB), and other benefits, employees will still be entitled to receive notice or payment-in-lieu of notice upon the termination of their employment.

COVID-19 Severance Pay

What an employee is entitled to upon termination of their employment depends on the terms of their employment agreement.  Employment agreements may have a termination clause that sets out the employee’s severance entitlement if their employment is terminated without cause.  Without a termination clause, courts imply a term into employment agreements that require employers to provide employees reasonable notice of termination, or pay in lieu of reasonable notice, whenever their employment is terminated without cause. 

When a court is asked to determine what “reasonable notice” is for a particular employee, courts will almost always refer to what are known as the Bardal factors: age, length of employment, character of employment, and availability of similar employment.

The detrimental impact of the outbreak of COVID-19 on the economy will most likely be considered by courts when they consider the availability of similar employment. The balance of judicial authority suggests that when there is a downturn in the economy, or particular sector of the economy, employers will be required to provide more reasonable notice, or pay in lieu of reasonable notice, than they might have otherwise. This is particularly the case in Alberta, where courts have consistently held that difficult economic times results in longer reasonable notice periods for employees.

Frustration of the Contract of Employment

While the outbreak of COVID-19 might mean longer reasonable notice periods for employees, employers facing extreme financial pressure, supply shortages, or long-term shut-downs required by law.  

When there is an unforeseen change in the circumstances underlying the contract of employment, through no fault of either party, making the contract of employment impossible to perform, employers may be able to claim that the contract of employment has been frustrated.  Employers should be cautious in claiming frustration, however, because the defence of frustration will not likely be available to an employer simply because it is experiencing unforeseeable economic difficulties.

The possibility of an employer claiming frustration is significant.  At common law and under the Frustrated Contracts Act, one of the effects of frustration is to excuse the parties from any further obligation to perform the contract. For employees, that might mean they will no longer need to be at work. But for employers, that might mean that they will be excused from their obligation to provide reasonable notice of termination, or pay in lieu of reasonable notice.

Severance Pay upon Bankruptcy due to COVID-19

Prolonged economic inactivity caused by the COVID-19 outbreak will inevitably cause some employers to become insolvent or go bankrupt. 

Federal and provincial legislation limits an employee’s entitlement to severance pay upon bankruptcy. For instance, the Bankruptcy and Insolvency Act limits the claims of a “clerk, servant, travelling salesperson, labourer or worker” against a bankrupt employer to unpaid “wages, salaries, commissions or compensation.” In bankruptcy, “compensation” includes vacation pay but not termination or severance pay. In addition, claims for “wages, salaries, commissions or compensation” may only reach as far back as 6 months prior to the bankruptcy and is limited to $2,000.

In Alberta, employees may also obtain relief against directors of their employer personally under the Business Corporations Act where the employer has made an assignment or receiving order under the Bankruptcy and Insolvency Act.

If you would like more information about severance pay, frustration of the contract of employment, or the impact of bankruptcy on please contact a member of the Carbert Waite Employment Law Group.