Both employees and employers alike commonly confuse “termination pay” with “severance pay.” However, these terms are not the same nor should they be used interchangeably with each other.
“Severance pay” is a payment made to an employee who qualifies for this payment simply because the work relationship between employer and employee has ended. In contrast, termination pay are payments made to a terminated employee, which is equal to an amount of money the employee would have received during the statutory notice period. To remind, employers are required to provide to employees notice of termination under statute and at common law. If the employer does not provide adequate notice to an employee then the employer is obliged to provide termination pay to the employee in lieu thereof and, under most circumstances, pay in lieu of reasonable notice at common law subject to various mitigation requirements. Although the employee can work through his or her statutory and common law notice of termination, the employee cannot be forced to do the same with respect to their “severance pay,” which is payable regardless of whether the employee received advanced notice of termination or not. “Termination pay” and “severance pay” are set out in Ontario’s Employment Standards Act (“ESA”).
So when does an employee qualify for severance pay? There are three main qualifiers for severance pay. The first is that the employer must 1) have a payroll of at least $2.5 million and 2) have severed the employment of at least 50 or more employees during a six-month period because some or all of the employer’s business is shutting down or closing on a permanent basis. The second qualifier is that the employee must have worked for the employer for at least 5 years. Finally, the third qualifier is that the employment relationship must in fact be “severed” which means that work relationship has somehow ended. For instance, the employer may have either dismissed the employee, “constructively” dismissed the employee or “laid-off” the employee beyond what the employer would otherwise be legally entitled to.
How much will the “severance payment” be for an employee who qualifies for severance? A simple math formula is used to calculate severance pay which is the amount of wages the employee would have received during a regular work week multiplied by the sum of 1) the number of weeks of completed years of employment and 2) the number of completed months of employment divided by 12 for a year that is not completed by the employee. There is a maximum allowance of weeks (which is 26) and this maximum is set out in the ESA.
Are there any exemptions from severance pay? There are certain situations in which an employee would not be entitled to severance pay despite qualifying for severance in other areas. For instance, if the employee works in the construction or on-site maintenance industry or the employee was fired for cause. There are other exemptions as well. It is best to contact an employment lawyer in order so that the employment lawyer can fully review an employee’s unique situation to determine if they qualify for severance pay or not.
Finally, it is important to remind that severance pay as set out above is made under the ESA and is considered to be a minimum statutory entitlement. An employee may be entitled to significantly greater entitlements under the common law. Please read our blog entitled “What You Need to Know about Common Law Notice” to learn more about common law notice periods upon termination or dismissal. Both employers and employees should seek out an employment lawyer to provide legal advice concerning employment rights upon termination or dismissal under both the ESA and common law before taking any action to enforce those rights.