What is severance pay?
In Ontario, severance pay is a type of compensation provided to long-term employees when they are terminated without cause. If a long-serving employee is let go for reasons other than significant workplace misconduct, they may be entitled to severance pay.
Under the Employment Standards Act, a person’s employment is “severed” when their employer:
- dismisses an employee due to the bankruptcy or insolvency of the company;
- “constructively” dismisses the employee and the employee resigns in response within a reasonable time;
- lays the employee off for 35 or more weeks in a period of 52 consecutive weeks;
- lays the employee off because all of the business at an establishment closes permanently; or
- gives the employee written notice of termination and the employee resigns after giving two weeks’ written notice, and the resignation takes effect during the statutory notice period.
How is it different from termination pay?
Although the terms “termination pay” and “severance pay” are often used interchangeably, severance pay is not the same as termination pay.
Termination pay is equivalent to pay in lieu of required notice of termination. In other words, termination pay provides the terminated employee with pay and benefits as if they had worked until the end of the notice period. Severance pay, on the other hand, is to compensate long-term employees for their loss of seniority as well as years of service and investment into the business.
If an employee has been continuously employed by the company for more than three months, they are entitled to termination pay (or a minimum amount of notice). Severance pay is for employees who have worked for the company for five or more years.
Who qualifies for severance pay?
Not everyone is entitled to severance pay. In order to receive severance pay, an employee must have worked for five or more years for an employer who has an annual payroll of $2.5 million or more. An employee who has worked for less than five years may also receive severance pay if they are terminated due to a permanent shut-down of the employer’s business and if there is a mass termination of fifty or more employees within a six- month period.
Based on the Ministry of Labour’s severance entitlement tool, an employer is not obligated to pay severance pay where an employee:
- is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and was not condoned by the employer;
- is employed in construction, working off-site, and is commonly associated in work or collective bargaining with employees who work at the construction site;
- is employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works;
- has refused an offer of reasonable alternative employment with the employer;
- has refused reasonable alternative employment that is available to the employee through a seniority system;
- on having his or her employment severed, retires and receives an actuarially unreduced pension benefit that reflects any service credits which the employee, had the employment not been severed, would have been expected to have earned in the normal course of events for purposes of the pension plan;
- was employed to provide professional services, personal support services or homemaking services as defined in the Home Care and Community Services Act, 1994 for an employer who had a contract to provide those services with a community care access corporation within the meaning of the Community Care Access Corporations Act, 2001, if the employee’s arrangement with the employer allowed the employee to elect to work or not to work when requested to do so by the employer and the employee had his or her employment severed before October 1, 2012.
- whose contract of employment has become impossible to perform (or has been frustrated) unless the impossibility or the frustration is the result of:
- A permanent discontinuance of all or part of the employer’s business because of a fortuitous or unforeseen event;
- The employer’s death;
- The employee’s death, if the employee received notice of termination before his or her death; or
- An illness or injury suffered by the employee; or
- has his or her employment severed as a result of a permanent discontinuance of all or part of the employer’s business that the employer can show was caused by the economic consequences of a strike.
How much is owed?
The amount of severance pay varies depending on each employee’s circumstances. Severance pay should be based on how long it should take an employee, acting reasonably, to secure a comparable job.
There are three types of applicable severance pay: (1) severance pay as stated in an employment contract, (2) statutory severance pay, and (3) common law severance pay.
- Employment contract
An employment contract may outline the amount of severance pay an employee is entitled to. If there is no employment contract or if the contract does not mention severance pay, common law severance pay applies.
- Statutory severance pay
This is the minimum amount of severance pay a qualifying employee is entitled for according to the Employment Standards Act, 2000. The statutory minimum is calculated using the following formula:
(regular weekly wages) x (# of months of employment)/12
For example, if an employee has a weekly wage of $600 and has worked for 5 years and 6 months, equivalently 66 months, they may be entitled to $3,300 because $600 x 66/12 = $3,300.
The maximum amount of statutory severance pay is 26 weeks.
- Common law severance pay
Most employees are entitled to more severance pay than the minimum statutory amount. When calculating the amount of common law severance pay, employers need to make a holistic assessment by examining a number of elements, typically known as Bardal factors, such as age, position, and availability of similar employment.
- Typically, older employs are entitled to a greater amount of severance pay to account for the fact that older employees may have more difficulties in seeking a comparable employment.
- Employees in senior positions may receive greater amounts of severance pay.
- Availability of similar employment
- It is one of the most important factors when determining the amount of severance pay. For instance, an employee in a declining industry, regardless of age or position, may receive greater amount of severance pay than someone in an industry of high demand because they will not be able to secure employment as quickly.
Other Bardal factors include length of employment, salary, experience, training and qualifications, and any other special circumstances that may affect the ability to secure a comparable job.