Year-End Terminations: Why December Firings Cost Employers More

The December Pattern

The phenomenon of year-end terminations is well-documented in Canadian employment law. Employment lawyers report a consistent surge in terminations in late November and December, followed by a second wave in early January. The pattern reflects several converging corporate incentives.

Fiscal year alignment. For employers with December 31 fiscal year-ends (which is the majority of Canadian corporations), terminating employees before year-end removes their salaries from the next year's budget and allows the employer to report lower headcount at year-end.

Bonus avoidance. Many annual bonus plans vest or crystallize on December 31 or are paid in the first quarter of the following year based on the prior year's performance. An employer that terminates an employee on December 15 may argue that the employee was not employed on the vesting date and is therefore not entitled to the annual bonus. As we will discuss, this argument frequently fails — but the attempt is common.

Performance review cycles. Many employers conduct annual performance reviews in November and December. An employer that has been contemplating terminating an underperforming employee may time the termination to coincide with the performance review cycle, using the review process to document the performance concerns that justify the termination.

New year, new budget. Restructurings and reorganizations are often planned to take effect at the beginning of a new fiscal year. The terminations that implement the restructuring are conducted in December so that the new organizational structure is in place by January 1.

The Bonus Problem

The single most significant financial issue in December terminations is the treatment of annual bonuses. Many employees earn a substantial portion of their total compensation through annual bonus plans. For senior employees, the bonus may constitute 20 to 50 percent of total compensation. The question of whether a terminated employee is entitled to a pro-rated or full-year bonus is often the most contested issue in the severance negotiation.

The Common Law Approach

At common law, the question of bonus entitlement during the reasonable notice period was comprehensively addressed by the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc., 2016 ONCA 618. The Court held that a terminated employee is entitled to compensation for all aspects of their remuneration during the reasonable notice period, including bonuses, unless the bonus plan contains clear and unambiguous language that limits or eliminates the employee's entitlement upon termination.

The Paquette framework requires courts to examine the bonus plan language. If the plan conditions bonus eligibility on the employee being "actively employed" on the payment date, the question is whether that condition unambiguously eliminates the employee's common law entitlement. The Court of Appeal has been skeptical of such conditions, holding that they must specifically and explicitly address the situation of a terminated employee working through their notice period — not merely require active employment in a general sense.

For December terminations, the Paquette analysis is critical. An employee terminated on December 15 who is entitled to 18 months of reasonable notice would be "employed" (for notice period purposes) until June of the following year. If the bonus for the prior year is paid in March — within the notice period — the employee is entitled to that bonus as part of their wrongful dismissal damages, unless the bonus plan unambiguously and explicitly excludes terminated employees from eligibility.

The Pratical Consequence

The practical consequence is that December terminations often trigger bonus liability that the employer was trying to avoid. An employer that terminates an employee on December 15 to avoid paying a bonus that would have been earned on December 31 may find that the employee is entitled to the bonus anyway — as part of their wrongful dismissal damages during the reasonable notice period. The timing intended to save money creates the opposite result.

Moreover, the employer's decision to terminate just before the bonus vesting date may itself constitute evidence of bad faith. Courts are attentive to the timing of terminations, and a termination that appears designed to deprive the employee of an imminent bonus may support a claim for moral damages under the Honda Canada Inc. v. Keays, 2008 SCC 39 framework.

Vacation Entitlements

December terminations also interact with vacation entitlements in ways that employers sometimes overlook.

Under the ESA, vacation pay accrues continuously during employment. An employee who is entitled to four percent vacation pay (two weeks' vacation) accrues vacation pay throughout the year. When the employee is terminated, all accrued but unpaid vacation pay must be paid out.

For employees on a calendar-year vacation cycle, a December termination means that the full year's vacation pay has accrued. If the employee has used some but not all of their vacation entitlement, the unused portion must be paid out. The employer cannot argue that the employee "would have" taken the remaining vacation days had they remained employed — the accrued entitlement must be paid.

At common law, the employee is also entitled to vacation pay during the reasonable notice period. An employee with 18 months of reasonable notice is entitled to 18 months of vacation pay as part of their wrongful dismissal damages. This is an additional cost that the employer must factor into the termination calculation.

Tax Implications of Year-End Terminations

The timing of a termination payment has significant tax implications for both the employer and the employee.

For the employee, a lump-sum severance payment received in December is taxed in the current tax year. Depending on the employee's other income for the year, the marginal tax rate on the severance payment may be high. An employee who receives a large severance payment in December — on top of 11.5 months of regular salary — may find that the combined income pushes them into a higher tax bracket for the year.

By contrast, an employee terminated in January who receives their severance in a new tax year may benefit from a lower marginal rate — because the severance is added to income in a year when the employee may have limited other earnings (particularly if they have not yet found new employment).

RRSP contributions. Certain components of a severance payment may be eligible for a direct transfer to the employee's RRSP, which defers the tax liability. The eligible amount depends on the employee's length of service and the nature of the payment. Employees terminated at year-end should consult a tax advisor about structuring the payment to maximize RRSP transfer eligibility.

The employer's perspective. From the employer's perspective, the timing of the payment affects which fiscal year the expense is recognized. A severance payment made in December is an expense in the current fiscal year. A payment made in January is an expense in the next fiscal year. Employers sometimes time the payment (not the termination) to align with their fiscal year preferences.

The Employment Insurance Interaction

Employees terminated in December face a practical EI challenge: the one-week waiting period and the processing time for EI claims can result in a gap in income during the holiday period. An employee terminated on December 15 who applies for EI immediately may not receive their first benefit payment until early to mid-January.

The Record of Employment (ROE) is critical. The employer must issue the ROE within five calendar days of the termination, and the ROE must accurately reflect the reason for termination. A delay in issuing the ROE — which is unfortunately common during the holiday period when payroll departments may be short-staffed — delays the employee's EI claim.

If the employer provides a lump-sum severance payment, the EI treatment depends on how the payment is characterized. Termination pay (pay in lieu of notice) is allocated to weeks and delays the start of EI benefits. Severance pay (under the ESA, section 64) does not delay EI benefits. The distinction matters significantly for the employee's cash flow during the post-termination period.

The Mitigation Challenge

Employees terminated in December face a particularly challenging mitigation environment. The holiday season is the slowest period for hiring across most industries. Companies that are hiring typically do not start the process until January or February. The employee terminated in December may face a two-to-three-month period of minimal hiring activity before the job market returns to normal seasonal patterns.

This seasonal hiring trough is relevant to the reasonable notice analysis. Courts assessing the availability of comparable employment — one of the Bardal factors — should take into account the seasonal hiring patterns of the employee's industry. An employee terminated on December 15 in an industry with minimal December and January hiring effectively loses two months of job-search time compared to an employee terminated in September.

Employment lawyers sometimes argue that December terminations should result in longer reasonable notice periods to account for the seasonal hiring trough. While courts have not established a formal "December premium," the seasonal context is a legitimate factor in the Bardal analysis and can support a notice period at the higher end of the range.

The Good Faith Dimension

The timing of a termination can be relevant to the duty of good faith. An employer that times a termination to avoid a specific obligation — a bonus that would vest in two weeks, a pension benefit that would vest on January 1, a stock option that would vest on the anniversary date — may be acting in bad faith.

Courts examine the employer's motivation. A termination that is genuinely driven by business needs — a restructuring, a position elimination, a performance issue — is not rendered bad faith merely because it occurs in December. But a termination that appears to be timed to deprive the employee of an imminent benefit, with no compelling business reason for the specific timing, raises bad faith concerns.

The employee's counsel should always examine what the employee would have received had the termination been delayed by two weeks, one month, or three months. If the answer reveals a significant benefit that the employee narrowly missed — a bonus, a pension vesting, a stock option vesting — the timing becomes a relevant factor in the damages analysis.

Practical Advice for Employees

If you are terminated in December, here are the key steps to protect your interests:

Do not sign a release before January. Take the holiday period to review the severance offer, consult an employment lawyer, and assess your options. There is no legal requirement to sign immediately, and the employer's deadline (which is typically 7 to 14 days) can usually be extended by request.

Assess your bonus entitlement. Review your bonus plan documents. Determine whether the bonus vests on a specific date, whether eligibility requires "active employment" on the vesting date, and whether the plan language addresses terminated employees. Your common law entitlement may include the bonus — regardless of what the plan says — if the plan language is not clear and unambiguous.

Calculate your vacation pay. Determine how much vacation you have accrued but not taken. This amount must be paid out upon termination, in addition to any other entitlements.

File for EI immediately. Do not wait until after the holidays. File your claim as soon as you receive your ROE (or as soon as your employer issues it). The one-week waiting period starts when you file, and any delay costs you money.

Document the timing. Note any benefits, bonuses, or entitlements that you would have received had the termination been delayed. This information may be relevant to the damages analysis and to the question of good faith.

Begin your job search. Despite the seasonal hiring trough, begin your job search immediately. Your duty to mitigate starts on the date of termination, and documented mitigation efforts protect your entitlement to damages.

The timing of a termination is not a neutral variable. December terminations create specific legal and financial dynamics that benefit informed employees and expose uninformed ones. Know your rights, act promptly, and do not let the holiday season distract you from protecting your interests.