A ‘severance package’ is a common phrase used to describe what an employee receives when they are let go by their employer. While in literal terms, this term can be used to describe a sum of money paid when the employment relationship is severed, it often creates confusion for employees when assessing the amount of pay they are entitled to. ‘Severance pay’ is a distinct concept and recognizing the difference between ‘severance pay’ and ‘pay in lieu of notice’ can have a significant impact on an employee’s entitlements at termination.
Pay in Lieu of Notice
In Canadian law, when employees are terminated without just cause, employees are entitled to be provided with prior notice of their termination.
This entitlement has been long established in Canadian jurisprudence. In Machtinger v HOJ Industries, [1992] 1 SCR 986, the Supreme Court of Canada recognized the difference in bargaining power and impact of a termination within a typical employment relationship between an employer and employee. To address this power imbalance and to protect employees, the court implied a term into all employment agreements that an employer must provide an employee with reasonable notice of their termination if the employee is not at fault for the termination.
If prior notice is not provided, an employer’s obligation is to provide pay in lieu of notice instead, that is pay the employee their wages following their termination as if they were provided with advance notice.
Although the provision of reasonable notice is implied, employers and employees are free to contract out of the obligation so long as the contractual entitlements do not provide less than required by minimum standards legislation. If the agreement does purport to provide less than required by minimum standards legislation, it would be rendered void and an employee would be entitled to reasonable notice as assessed by the court.
If that’s the case, what is ‘severance pay’?
Technically speaking, ‘severance pay’ in law is an entirely separate payment required by legislation, such as the Employment Standards Act, 2000, SO 2000, c 41 (the “ESA”) in Ontario. Under the ESA, an employee is entitled to severance pay upon termination without cause if:
- The employee was employed for five or more years
- The employer has a payroll of $2.5 million or more
Severance pay is distinct from termination pay and/or notice, the calculation of which is also outlined in the ESA. Generally speaking, under the ESA employees are entitled to notice or pay in lieu of notice equal to one week per year of service to a maximum of 8 weeks.
Under the ESA, employees would be entitled to one week per year of service of severance pay at termination, to a maximum of 26 weeks. A ten-year employee would be entitled to 10 weeks’ severance pay, in addition to 8 weeks’ termination notice or pay.
Practical Differences
In almost all cases, reasonable notice as assessed by the courts is significantly higher than any statutory minimums, including payments of severance pay and termination pay as discussed above. Even if an employee receives their entitlements under the ESA, their actual entitlement to a reasonable notice ‘severance package’ may be higher than what their employer had provided. As opposed to the week-per-year for termination notice (and week-per-year in severance pay), a reasonable notice assessed by the court usually range from 3 to 5 weeks per year of service depending on the age, position, and length of tenure of the employee.
In some cases, the wording of the termination clause itself may be faulty and additional payment by an employer. In Nemeth v Hatch, 2018 ONCA 7, the plaintiff had a termination clause that had the following termination provision:
The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.
The employer in this case paid the 19-year employee 8 weeks’ pay in lieu of notice and 19.42 weeks’ pay for severance pay. However, because the clause itself only stipulated termination notice, the court found that the employee was entitled to 19 weeks’ termination notice in addition to his 19.42 weeks’ severance pay. This additional compensation was grounded entirely on the statutory difference between termination notice and severance pay.
Know the Difference
Knowledge of different termination entitlements gives employees the tools to consider the fairness of their severance package. At the time of termination, it is important for an employee to maximize their entitlements as it may take a long time to find alternative employment. Subtle differences in the language in an agreement can have a significant impact on an employee’s pay in lieu of notice.
If you are unsure about your entitlements at termination, contact Monkhouse Law for a free consultation.
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