What is pay in lieu?
For every “without cause” termination in Canada (and Ontario), an employer must provide “notice” of the employee’s impending dismissal. “Notice” is an advanced warning of the termination. Employers have a choice to provide notice in one of two ways: (1) working notice or (2) pay in lieu.
Few employers provide working notice, instead opting for pay in lieu of notice. It is said that pay in lieu of notice is preferable over working notice because there is a risk a someone provided working notice will harm the employer
Pay in lieu is called pay in lieu because the employer is opting to pay the employee what she would have earned had she worked the working notice. The employer is saying, essentially, “sorry, you’re fired, don’t bother coming back into work, here is a lump sum check in lieu of any advanced warning, so sign this release and good luck”.
Employees are not entitled to pay in lieu if they are terminated for cause.
Example of pay in lieu
Here is an example of pay in lieu to help you understand the concept:
Sarah worked for the company for seven years. A decision is made to terminate Sarah without cause. The parties have a contract that entitles Sarah to seven months notice. The employer pays Sarah a lump sum of seven months pay in lieu of having Sarah work the seven month notice period. Therefore, Sarah is said to have received “pay in lieu”.
How to calculate pay in lieu?
The amount of pay in lieu of notice an employee is entitled depends on if they have a valid termination clause in their employment contract. If they do have a valid termination clause in their employment contract, then they are entitled to exactly that much pay in lieu of notice.
For instance, Alisha could have a contract that has a termination clause that says in the event of termination, she is entitled to two weeks’ notice for every year of service. In that case, if Alisha worked for ten years, her employer would owe her twenty weeks of pay in lieu of notice.
However, if there is no employment contract or if there is a contract but no valid termination clause, then a dismissed employee is entitled to something called “reasonable” pay in lieu of notice.
Calculating “reasonable” pay in lieu
The most important factors for determining “reasonable” pay in lieu are the character of the employee’s employment, the employee’s length of service, the employee’s age and the availability of similar employment, having regard to the employee’s experience, training and qualifications. Other factors the courts have considered include:
- whether the dismissed employee was induced to leave previous secure employment through promises of career advancement, more compensation, or similar enticements;
- whether the employer had a particular policy or practice for providing notice;
- whether there was an industry custom concerning notice;
- and whether the employee had some forewarning of the dismissal.
In applying the above factors, the courts have generally avoided a specific formula for determining reasonable pay in lieu.
As stated by Justice Laskin in Minott v. O’Shanter Development Co., 1999 CanLII 3686 (ON CA), 168 D.L.R. (4th) 270, at para. 62, “[d]etermining the period of reasonable [pay in lieu of] notice is an art not a science”:
In each case trial judges must weigh and balance a catalogue of relevant factors. No two cases are identical; and, ordinarily, there is no one “right” figure for reasonable notice. Instead, most cases yield a range of reasonableness.
Likewise, in McKay v. Eaton Yale Ltd., 1996 CanLII 8234 (ON SC),  O.J. No. 3982 (QL), 31 C.C.E.L. (2d) 295 (Gen. Div.), Molloy J. held (at paras. 4-5):
The determination of the appropriate [pay in lieu of] notice period for dismissed employees is an exercise which involves more art than science. The general principles to be applied emerge readily from well-established case law, but the application of those principles to any given fact situation is not a precise or mathematical process. All of the relevant factors must be weighed in the balance in order to individually tailor a notice period based on certain personal and employment characteristics of the plaintiff. … Because no two cases are ever exactly the same, and because the weight to be given to the relevant factors is at least in part a subjective exercise, it is not unusual to find different notice periods being determined by different judges in situations which may appear on the surface to be very similar….
There is no “rule of thumb” approach to calculating the period of reasonable pay in lieu of notice in which something like one month of notice is awarded for each year of service. Indeed, the Ontario Court of Appeal has expressly rejected a “rule of thumb”:
The rule of thumb approach seeks to achieve this flexibility by using the other factors to increase or decrease the period of reasonable [pay in lieu of] notice from the starting point measured by the length of service. But to be meaningful at all, this approach must still give unnecessary prominence to the length of service. Thus, in my opinion, the rule of thumb approach is not warranted in principle, nor is it supported by authority.
Moreover, it is not reflected in the wrongful dismissal awards made daily by trial judges. In a recent paper, “Measuring the Rule of Thumb in Wrongful Dismissal Cases” (1998), 31 C.C.E.L. (2d) 311, Barry Fisher used his wrongful dismissal database (nearly 1,600 cases at the time) to show that the rule of thumb had little or no validity as a predictor of reasonable notice for short term or long term employees, though it had “some validity for cases in the mid-seniority range” (at p.317).Minott v. O’Shanter Development Co. (supra)
You can, however, see the average amount of pay in lieu of notice awarded in Ontario to employees to get a good idea on what each case could approximately yield. Otherwise, if you are in Ontario, you can call our law group for a free consultation, and we can estimate your reasonable pay in lieu of notice using your factors and our knowledge of similar cases that have proceeded through the courts.
Further Reading: Our post on calculating pay in lieu in Ontario.
All kinds of names for pay in lieu of notice
Pay in lieu of notice is called many things, including common-law severance or termination pay, but they all mean the same thing: the money an employer pays an employee instead of giving them working notice.
One caveat is that in Ontario specifically, there is something called “statutory severance” which is strictly different than ‘pay in lieu of notice’ (statutory severance is a formulaic amount of money some employees with 5+ years experience must receive). But, statutory severance is just a minimum, and employees shouldn’t want that anyways; rather they should want a common law severance, which is the same thing as pay in lieu of notice. Confused? Just remember statutory severance is just a minimum, whereas common law severance is the maximum. You want the maximum, right? The Ministry of Labour can enforce statutory severance only (for free), whereas a lawyer can enforce common law severance (at a cost).
You can think of statutory severance versus common law severance this way: If someone gets eight months of common law severance, the first eight weeks of that amount would be considered the “statutory period” of severance.
Read more: Who is entitled to severance pay?
What is included in pay in lieu of notice?
Generally, for pay in lieu of notice, unless an employment contract says otherwise, an employee must be given all the compensation he would have received had he instead worked the whole working notice period. For example, an employee who is offered pay in lieu must be offered their full salary, benefits, bonus, commission and other variable compensation.
The easiest way to determine how much pay in lieu of notice is required is by looking at the average income and value of fringe benefits over the last year, dividing that by 12 and multiplying it by the number of months of notice that is owed to the employee. If the employer offers anything less, it could be a wrongful dismissal.
In most cases, an employer has to continue the employee’s benefits (instead of pay in lieu) over the notice period because the employee would not be able to purchase certain benefits like health and dental and disability insurance himself at the same rate.
Concerning vacation pay, an employer only needs to pay that amount over the statutory portion of the notice period. The statutory period of notice is simple to calculate: 1 week of notice per year of service up to a maximum of 8 weeks. Here the government’s pay in lieu of notice calculator for statutory, minimum notice only (this calculator does not calculate common law notice).
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.