All about Severance

“Severance Pay” and “Severance Package”
The terms “severance pay” and “severance package” are often used interchangeably. In strict legal terms however, the two are not synonymous. “Severance pay” refers to certain pay mandated by statute in certain circumstances. A “severance package” can include “severance pay”, but not necessarily.

In Ontario, the Employment Standards Act applies to all employees whose employers are provincially regulated. For employees who work for federally regulated employers, the Canada Labour Code applies. Each of these statutes provide for severance pay if certain conditions are met.

Severance Pay under the Employment Standards Act
Under the Employment Standards Act, an employee whose employment is terminated (including lay-off that becomes termination) through no fault of his own sufficient to constitute just cause for termination at law (or, simply put, on a without cause basis) is entitled to severance pay if the following conditions are met:

• The employee has been employed with the same employer for at least 5 years; AND

• The employer has an annual employee payroll of at least $2.5 million per year; OR

• At least 50 employees of the employer lose their employment within a six (6) month period due to lay-offs.

If these conditions are met, the employee will be entitled to one (1) week of regular pay for every year of service with the employer, up to a maximum of twenty six (26) weeks. It is important to note that for the purposes of calculating severance pay, it is not necessary that the employee’s employment be uninterrupted. All years of service in Ontario are taken into account when calculating severance pay. Generally speaking, any completed years of service for the same employer outside of Ontario are not taken into account. Interestingly, it has been held, in recent case law, that a determination of the employer’s payroll need not be restricted to its payroll in Ontario when determining an employer’s annual payroll, though there are several other cases that state the opposite with respect to this issue.

Severance Pay under the Canada Labour Code

Under the Canada Labour Code, an employee whose employment is terminated (including lay-off that becomes termination) through no fault of his own sufficient to constitute just cause for termination at law (or, simply put, on a without cause basis) is entitled to severance pay if the employee has been employed with the same employer for at least twelve (12) consecutive months of continuous employment.

Under the Canada Labour Code, the terminated employee will be entitled to two (2) days of pay for every completed year of service, with a minimum of five (5) days of severance pay.

Other Key Facts about Severance Pay

Severance pay cannot be given as working notice
Unlike the requirement to give notice, which employers have discretion to provide either as working notice or pay-in-lieu of notice, severance pay cannot be substituted with working notice. In other words, an employee cannot work his severance instead of receiving severance pay. An employer must pay the severance pay.

Payment of severance pay is, in most cases, only part compliance with statute
Compliance with the requirement to pay severance pay will not, in the vast majority of cases, absolve an employer of its statutory obligations arising from the termination of an employee’s employment. Both the Employment Standards Act and the Canada Labour Code prescribe other minimum requirements that must be met before the termination complies with the respective, applicable statute. For example, both the Employment Standards Act and the Canada Labour Code prescribe entitlement to notice or pay-in-lieu of notice (which is separate from severance pay), as well as payment of any accrued and unpaid vacation, any unpaid wages, etc.

Full compliance with legislation does not usually absolve employer of liability
Finally, full compliance with the applicable legislation does not necessarily mean that an employer has no further obligations toward the terminated employee.

Both the Employment Standards Act and the Canada Labour Code prescribe mandatory minimums only. However, employees are presumed at law to be entitled to reasonable notice or pay-in-lieu thereof, which is often in significant excess of legislative entitlements. Unless an employee’s employment contract rebuts the presumption of common law notice in clear language through a termination clause, the employee will be entitled to reasonable notice, or pay-in-lieu of notice, at common law.