What You Need To Know About Severance Packages

severance packages

You’ve been let go and your employer offered you a severance package. Is it fair? Read our article to learn how severance packages are calculated and what needs to be taken into consideration before signing off.

How are severance packages calculated?

How severance packages are calculated depends on if you have an employment contract with a valid termination clause that provides how your termination entitlements are to be calculated.

1. Default: Common-Law Reasonable Notice
If your employment contract does not have provisions regarding payments on termination or if those provisions are invalid, you may be entitled to what’s called common law reasonable notice of termination. Reasonable notice is meant to compensate you for the time it will likely take you to find comparable employment. There is no single calculation to determine how much notice you are owed; rather, your notice period is calculated with a variety of factors called the “Bardal Factors”. These factors have been recognized by the Supreme Court of Canada as the proper method to be used when calculating a dismissed employee’s reasonable notice period. Those include:

    • Your age;
    • Your salary;
    • Your position;
    • Your years of service;
    • Your experience, training, and qualifications;
    • The availability of similar employment; 
    • The economic situation at the time of termination; and 
    • Any other special circumstances impacting your ability to find comparable employment.

Other, less common factors may also lengthen this period of time, such as: 

    • If you were induced or solicited away from stable employment to work for your employer;
    • If your employer promised you long term, secure employment;
    • If you have been prevented from competing against the employer due to a non-compete, non-solicit, or other restraint of trade clause; 
    • If there has been a downturn in the your industry; and
    • If you do not have a university education and new jobs would require a university education. 

All of these factors, and more, are used to determine how much time it will reasonably take you to find comparable employment. Most often, you get a lump sum of money as severance pay in lieu of notice of termination for period in addition to other terms that can be negotiated.

2. Contractual Provisions Regarding Severance Packages
Your employment contract may contain provisions that attempt to limit your entitlements on termination to statutory minimums, or to other amounts. These provisions often legally mean something different than what they would be considered to mean in standard English since the law around contractual agreements relating to severance packages changes over time. For this reason, it is wise to consult with an employment lawyer at Monkhouse Law to determine what your severance pay might be for any contractual provision.

What is a typical severance package in Ontario?

Most often, severance packages will be comprised of the following four elements:

  1. Cash or salary continuation (for notice period);
  2. Accrued bonus (pro-rated for the notice period);
  3. All monies owed (unpaid wages, accrued vacation, etc.); and
  4. Benefits continuation, RRSP, CPP contributions (for notice period)

You might think that, because your employer offered you the above elements, that you are only entitled to statutory severance pay and benefits continuation. However, depending on your particular circumstances, you may actually be entitled to additional compensation.

What is considered a good severance package?  

An experienced employment lawyer will be able to help negotiate a fair, dynamic severance package that speaks to the work you’ve completed for your employer. Components of a strongly negotiated severance package can include:

  • Commissions and variable compensation in the amount of what you would have reasonable earned over notice period;
  • Car or mileage allowance (for notice period);
  • Outplacement/retraining;
  • Letter of reference or employment, as appropriate;
  • Compensation for legal fees;
  • Other perks of the job (phone costs, gym memberships, etc.); and
  • Monetary damages for discrimination, the way in which you were terminated, or other injustices 

The principle behind bonuses, perks, and commissions being recoverable is that you are meant to be fully compensated for the time it will likely take you to find similar employment. If something beyond your base salary comprises an integral part of your compensation, you can ask that it be included in your severance package for the duration of your notice period. 

Is 6 months’ severance good? 

Determining if 6 months’ pay in lieu of notice is a good severance package depends on the particular circumstances of your employment. By way of example, if you are a young employee who worked for an employer for a period of four years, then 6 months’ pay is likely a good severance package. In contrast, if you are slightly older and have worked for your employer for over six years, then 6 months’ is likely much less favourable severance package that may well be improved upon. 

Is severance guaranteed?

Severance packages are not always guaranteed. If you have been terminated with cause or while on probation, you might not be entitled to a severance package. Having said that, some employers may terminate an employee under the guise of just cause when they do not, in fact, have the high level of cause (such as willful negligence, sexual harassment, or fraud) necessary to deprive the employee of their severance. Similarly, some employers might attempt to abuse probationary periods to deprive terminated employees of severance packages to which they would otherwise be entitled. 

Many employees are entitled to severance packages but do not realize it. Even more commonly, many employees are entitled to more generous severance packages that they have been offered. As a result, if your employment has been terminated, it is best practice to get a legal opinion on whether you are entitled to a severance package and, if so, what a fair severance package might contain. 

How much is a severance package taxed?

A severance package is often taxed at the same rate as income. How much that may be depends on where you live and your income. Unlike income, though, if paid in certain ways, such as a ‘retiring allowance’ it is not subject to any CPP or EI deductions. There are certain characterizations which greatly reduce taxes in specific circumstances.

If taxes are to be paid then taxes are deducted by your employer, meaning you may get some tax back when you file your taxes later on.

The way a severance package is allocated can be negotiated to be more tax-efficient for the employee.  For example, the money can be put in an RRSP, it can be distributed over the course of several years, or it can be allocated as general damages. An employment lawyer will be able to construct the most tax-savvy severance package for your particular circumstances.

Can you collect unemployment if you take a severance package?

Severance packages often impact your ability to collect EI. You generally cannot collect EI and receive a severance package for the same period of time. Severance packages are considered earning which would extend the period until you receive EI.

You cannot collect EI benefits during your severance period. Accordingly, if you negotiate a severance package of 5 months, you cannot also collect EI for those 5 months. Your EI would start after the 5 months. So if you have a 12 months severance package you can receive full pay for 12 months then afterwards receive EI for an additional 8-12 months (depending on the location and circumstance).

If you did collect both simultaneously, or if you earned EI benefits and then subsequently negotiated a severance package for yourself, you will have to repay Service Canada your EI for the overlapping time periods. So, for instance, if you collected EI for 12 weeks and later negotiated a 4-week severance pay after the fact, you would have to repay EI for those 4 weeks.

However, by repaying the EI you ‘re-qualify’ to be able to get EI. In effect if you pay back EI for any weeks that then gives you the ability to add those weeks onto your EI period afterwards.

It is generally advisable to apply for EI immediately after termination, as there are various EI deadlines, if missed, could impact your ability to later collect your full EI entitlements.

Employment lawyers at Monkhouse Law can also help you to structure your severance package in a way that lessens any EI clawbacks — wherein you must return the EI money that was given to you  — that you might normally be subject to.

Can you get another job while on severance?

You can get another job while receiving severance. However, when you start the new employment, it can impact the amount of severance pay to which you are entitled.  

Most employees have a duty to mitigate their losses upon termination. This means that you must look for and obtain comparable employment after your employment has ended. The duty to mitigate does not require that you take the first job that comes your way; you do not have to accept a job that constitutes a significant demotion, pay decrease, or is in an industry outside your area of expertise. For instance, if you are a construction project manager, you do not have to take a job as a customer services representative. However, if you turn down or fail to look for similar employment and attempt to collect severance pay without mitigating, this is considered unfair to the employer. For that reason, it is good practice to keep a journal tracking what jobs you have applied for and when.

To illustrate, if you accept a severance package with 8 months’ pay in lieu of notice and find a new job only 3 months after the termination of your employment, you are under no obligation to give any of your severance package back; you are entitled to the full 8 months’ pay. In contrast, if you are in the middle of negotiating an 8-month severance package and then accept a new job after only 3 months, your employer may assert that you are only entitled to a 3-month severance package. This is because, arguably, 3 months’ pay in lieu of service compensates you for the time between your termination and your acceptance of the new position. 

There are exceptions to this clawback, including fixed term contracts, and certain other negotiated settlements.

How do I know if my severance package is fair?

It is important to get an evaluation of your severance package prior to accepting it or signing any kind of release. As has been demonstrated throughout this article, there is no cut and dry way to determine if your severance package is adequate. It depends on a plethora of circumstances and can be quite complex. There are other factors such as that if you waive the right to have long-term disability coverage during your notice period and then subsequently become disabled late in the notice period this could mean a lot less money to you in the long-term.

The reality of severance packages is that much rests on the ability of you and your legal representative to strongly and effectively advocate for a fair severance package that adequately compensates you for your time with your employer.

If your employment has been terminated and you have been offered a severance package, it is critical that you contact us as soon as possible to help ensure that you are receiving a reasonable and fair package. 

Reviewing your severance package with an employment lawyer at Monkhouse Law will give you peace of mind and ensure that you have all the information you need to negotiate the best deal possible.

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