May 11

What is Severance Pay? – Employment Lawyer Toronto

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Severance Pay – It’s Not What You Think

When someone is terminated from his or her employment a few terms often thrown around include “severance pay” and “severance package.”  While you may have heard these terms before, there is a common misconception regarding what the term “severance” actually means in an employment law context. This post describes defines severance pay and describes the differences between severance and termination pay for provincially regulated employees in Ontario.

Termination Pay

Termination pay and severance pay have very different meanings.  When discussing what termination pay is, this represents an employee’s pay in lieu of notice for the termination of their employment. 

Employees who are terminated without cause are generally entitled to notice that their employment is ending. If an employer does not want to provide working notice of termination an employer can elect to pay that employee out for the notice period instead of having them show up to work everyday – this represents termination pay or pay in lieu of notice. Termination pay is often what people are referring to when they are talking about severance pay.

The amount of termination pay you will receive upon the conclusion of your employment depends on many factors, such as your contract, the nature of your employment, your age and your years of service. The minimum termination pay is set out in the Employment Standards Act, 2000, (the “ESA”), but it is by no means the maximum and many employees are entitled to far more than the ESA minimums.

Severance Pay

So how does termination pay differ from severance pay?  Severance pay is above and beyond termination pay and is only available to some employees upon termination without cause and would be in addition to termination pay or pay in lieu of notice as described above. Severance pay minimums are also defined by the ESA.

Under the ESA severance pay is only available to those who:

·                    have worked for the employer for five years or more; and

·                    the employer has a payroll in Ontario of at least $2.5 million; OR

·                    the employer has severed the employment of 50 or more employees within a six month period because the business is permanently closing or part of the business is completely closing.

Calculations – ESA Minimum Termination Pay vs Severance Pay

Further, severance pay is calculated differently than termination pay.  The ESA minimums for termination pay are based on years of service and are capped at a maximum of 8 weeks total. This means if you have worked at a company for 2 years you will receive 2 weeks of notice or pay in lieu, 3 years will mean 3 weeks of notice and so on. However, if you have more than 8 years of service you will be capped at 8 weeks of notice or pay in lieu. In practice this means an 8-year employee will receive the same amount of notice as a 28-year employee under the ESA (although he or she may receive longer notice under common law).

Severance pay is also calculated based on service, but is calculated using the total years of completed employment and the number of complete months in a year that is not completed. This means if you have 5 years and 6 months of service you would receive 5.5 weeks of severance pay. In addition to providing compensation for partial years of service, severance pay has much higher maximums. Instead of capping at 8 weeks, severance pay is paid to a maximum of 26 weeks.

Severance pay is in addition to termination pay. A 26-year employee will receive the maximum termination pay of 8 weeks PLUS, if eligible, the maximum severance pay of 26 weeks for a total of 34 weeks of pay.

Common Law Notice provides the most support for employees

The final type of termination pay/severance pay to consider is common law notice.  Common law notice is a concept that the courts have developed in order to determine the appropriate notice period for terminated employees.

The court can provide a significantly longer notice period above and beyond the legislative minimums.

This means that the courts have generally found that the legislative minimum amounts do not tend to be long enough and that the average person in a position similar to yours would take longer to find a new job. The result of a longer notice period tends to mean more money at the time of termination. In order to get common law notice, it is best to consult with an employment lawyer to see if you qualify.

Advice for Employees:

Regardless of your eligibility for severance pay, it is advisable that you have the termination package reviewed by a lawyer to ensure that you are receiving all of your statutory, contractual and common law entitlements. Contact Monkhouse Law today for a free 30 minute consultation for more information.

Advice for Employers:

It is important that you are clear with the employees you are terminating about their entitlements upon termination and provide severance pay to eligible employees when required.  Contact Monkhouse Law today to ensure your termination policies and packages are in compliance with the law, which can help you avoid further litigation costs and headaches in the future.