In Canada, whether you are obligated to pay severance to an employee who declines a new position and is subsequently terminated depends on several factors:

Nature of the Offered Position: If the new position is substantially similar to the employee’s current role in terms of duties, responsibilities, compensation, and working conditions, and the employee declines it without reasonable justification, this might affect their entitlement to severance. However, if the new role represents a significant change—such as reduced pay, lower status, different location, or altered hours—the employee may have valid grounds to refuse it.

Constructive Dismissal: Offering a new position that significantly alters the terms of employment without the employee’s consent can be considered a constructive dismissal. In such cases, the employee may be entitled to severance pay as if they were terminated without cause, even if they declined the new position.

Employment Standards Legislation: Provincial employment standards laws or the federal Canada Labour Code (if the employment falls under federal jurisdiction) set minimum requirements for notice of termination or severance pay. Typically, if an employee is terminated without cause, they are entitled to either working notice or pay in lieu of notice, regardless of whether they declined a new position.

Common Law Obligations: Beyond statutory requirements, common law in Canada may obligate employers to provide “reasonable notice” of termination or equivalent compensation. Factors influencing this include the employee’s age, length of service, character of employment, and availability of similar work.

Duty to Mitigate: Employees are expected to mitigate their losses by seeking comparable employment after termination. However, they are not usually required to accept a substantially different or lesser position with the same employer to mitigate damages.

Good Faith and Fair Dealing: Employers have a duty to act in good faith during the termination process. Abruptly terminating an employee because they declined a new position could be seen as bad faith, potentially leading to additional damages.

Recommendation:

Given the complexities and potential legal ramifications, it’s advisable to consult with an employment lawyer familiar with Canadian law. They can provide guidance tailored to your specific situation, helping ensure that you comply with all legal obligations and minimize potential liabilities when terminating the employee.