Labour & Employment Law Blog

What You Need to Know About Severance Pay

What You Need to Know About Severance Pay

We regularly assist our clients with issues relating to severance pay. From our experience, how severance pay is different from notice or termination pay remains unclear for many employers and employees alike. For instance, severance and termination pay are terms that are often erroneously used interchangeably by the public. These terms are not the same and have distinct implications. This blog seeks to clarify some key concepts and concerns relating to severance pay.

What is severance pay?

Severance pay is a monetary payment made to an employee who qualifies when the employee loses their job or when their job has been “severed” (somehow ended). For instance, the employment relationship could have been “severed” because the employer dismissed or terminated the employee, or the employer could have “laid-off” the employee beyond what the employer would otherwise be entitled to do under the Employment Standards Act, 2000 (“ESA”). Severance pay is not termination pay and these terms should not be used interchangeably. To remind our readers, termination pay is monetary payment given to a terminated or dismissed employee which is equal to an amount of money the employee would have received during the statutory notice period. Both “termination pay” and “severance pay” are concepts defined under the ESA.

How does an employee qualify for severance pay?

In the absence of a mass termination there are typically two qualifiers for the employee to obtain severance pay once employment with the employer has been severed. The first is that the employee must have worked for the employer for five (5) or more years. The time may or may not be continuous or may sometimes be active or not, but the time spent in employment with the employer must be at least five (5) years. The second qualifier is that the employer must have a payroll of at least $2.5 million. An employee may also be entitled to severance pay if it was the subject to a mass termination in accordance with the various rules set out in the ESA.

If the employee has met the qualifiers as set out above, they may obtain severance pay. There are several different reasons why an otherwise qualified employee would still not be entitled to severance pay. For instance, the employee may be offered some sort of reasonable alternative position by the employer for work, but the employee refused that offer. It would be best to contact an employment lawyer in these situations to discuss what the best steps are moving forward.

How is the amount of severance pay calculated?

There is a math formula that is used to calculate the amount of severance pay that an employee would receive. Basically, the amount of the employee’s regular wages for a workweek is multiplied by the sum of the number of years of completed employment and the number of months of employment completed divided by 12 for a year that is not completed.
The maximum amount of severance that an employer would be required to pay is twenty-six (26) weeks.

The use of online severance calculators

We can understand why using an online severance calculator to try to figure out what compensation may be owed to a recently dismissed employee would be very attractive to a lot of people. It’s quick, easy, and free in comparison to having to go to a lawyer to determine what severance package, if any, is owed. To be clear, there is nothing wrong with using an online severance calculator per se to get a rough idea of one’s common law entitlements. However, in our opinion, the biggest problem with online severance calculators is that the online severance calculator simply cannot tell the employee the whole story related to their job. In our experience, typically there are too may variables involved in an employment file which a severance calculator cannot account for. The following non-exhaustive list of factors comes to mind:

  • whether the employee was terminated for cause (if so under which standard, the common law or the ESA);
  • whether the employee was bound by an enforceable termination clause in the employment agreement;
  • whether the employee was induced to leave a former secured employment;
  • whether the employee found a job following his or her termination, if so when;
  • whether the employee was constructively dismissed;
  • whether the employee resigned their employment;
  • whether the employee’s employment was subject to a sale of business (if so, was the sale a shares or assets sale?);
  • whether the employee experienced discrimination and/or other forms of unlawful conduct that would entitle him or her to additional types of damages;
  • whether there are specific corporate power dynamics that led to the employee’s dismissal;
  • whether the employee discharged its legal duty to act in good faith and fair dealing in the manner of the employee’s dismissal;
  • whether the employee was subject to a collective agreement; and,
  • whether the severance package includes inappropriate provisions such as restrictive covenants and claw back obligations.

In short, although a severance calculator may be a perfectly good introductory tool, in our opinion it is thereafter advisable to have an employment lawyer review the employee’s termination package including the circumstances leading to the employee’s dismissal. It is best practice to use an employment lawyer in a consultation in a situation where the employee needs to review a termination package, or the employer needs to prepare an exist for an existing employee. An experienced employment lawyer will discuss the basic factors that a severance calculator will likely be able to accomplish, however, they will also go over the type of additional factors listed above in order to get a fully comprehensive picture of the person’s case.

The above article is for general information purposes only, does not constitute legal advice or create a solicitor-client relationship. Because each case is unique and factually driven, if you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere. We represent clients in the Greater Toronto Area including Toronto, North York, Markham, Vaughan, Thornhill, Newmarket, Aurora, Brampton, Mississauga, Barrie, Ajax, Whitby, Pickering and Oshawa.