In Canada, no one is entitled to a job and no one is entitled to keep a job, just like in the US. However, one of the most pivotal rights in Canada, which does not exist in the US, is an employee’s entitlement to reasonable notice of termination. This common law legal protection serves as a protective shield for workers, ensuring they are not abruptly left jobless without significant warning or monies in lieu of such warning. However, while this right is a cornerstone of employment fairness, it also perhaps presents a negative impact on the Canadian economy.
In this article, I’ll explore the nuances of this law and its effect on Canada’s economic landscape.
The Protective Umbrella for Employees
The concept of reasonable notice in Canada is designed to provide workers with a safety net. When an employee is terminated without cause, the law mandates that they must be given adequate time to prepare for their impending unemployment (or given pay in lieu). This “notice period”, which varies depending on the length of employment and other factors, allows workers to search for new employment while still earning an income.
Truth be told, reasonable notice is very generous ($$$) in Canada. However, the generousness of Canadians’ rights to reasonable notice (or, more commonly, pay in lieu of such notice) could theoretically affect the economics of our labour force.
The fact is, rational employers will always be less inclined to hire more workers when it costs them more to do so. In this way, the right to reasonable notice adds a not-insignificant cost to most employment relationships. Indeed, employers have to pay anywhere from about three to twenty-four months’ reasonable notice when, not if, they have to fire someone. In the result, the following pressures on the economy are observed:
Costs to Businesses:
- Increased Financial Burden: Employers must continue paying salaries during the lengthy reasonable notice period or provide a lump sum equivalent to the wages that would have been earned in such period. This financial obligation can be substantial, especially for small and medium-sized enterprises (SMEs) who employ long tenure-having, sophisticated employees. Indeed, even low-level employees who work just one shift before they are let go from work can be entitled to three months’ notice.
- Operational Inefficiencies: If it is “worked” by the employee, the notice period (which is an option many employers forgot they have long ago it seems) can lead to operational challenges for employers. For instance, if an employee is no longer motivated or aligned with the company during their notice period, it can affect productivity and team dynamics. Few employers want to employ someone who has “checked out”.
Impact on Hiring Practices:
- Cautious Hiring: Knowing the potential costs associated with termination, even for new employees, employers might become more cautious in their hiring practices. This could lead to slower job creation and a more rigid labour market.
- Preference for Contractual Work: Some businesses might be inclined towards hiring bonafide or misrepresented contractual or temporary workers to circumvent the financial implications of the reasonable notice requirement.
In summary, employers in Canada may be tepid to hire as many new employees as needed because of fear of inevitably paying out a big severance packages for each new hire. American employers do not have the same fear because there is no concept of “reasonable notice” in American law.
Balancing Act: Protecting Workers vs. Economic Agility
The crux of the debate lies in balancing protecting workers’ rights and maintaining economic flexibility and competitiveness. While the right to reasonable notice undeniably offers a crucial safety net for employees, its economic ramifications should maybe be considered. It poses a particular challenge in rapidly changing industries where agility is key to growth.
Now, in 2023, nearly all savvy employers have started to increasingly use modern, well crafted employment contracts to oust employees’ rights to reasonable notice (hurting employees who normally would have had a right to reasonable notice if they had been hired just a few years earlier). However, the ability to contract out of the common law right to reasonable notice still isn’t enough to tide all employer fears. Every few years, all employment contracts run the serious risk of being held void because of a change in the law or the jurisprudence. Most employers know this as a fact.
The right to reasonable notice of termination in Canada is a testament to the country’s commitment to fair labour practices. It underscores the value placed on workers. However, its impact on the economy, particularly on small businesses and the fluidity of the new job market, is a complex issue that requires perhaps innovative policy approaches.
Look at the US (a country with no right to reasonable notice) – their unemployment rate is 3.9%. Now compare Canada’s unemployment rate, which is 5.7% as of today.
I’m not saying the fact Canada has reasonable notice and the US does not is the explanation for the disparity in the unemployment rate, but I wonder, how much does it contribute to it? 0.1%? Less or more? Let me know in the comments.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.