Severance packages and pay refer to two different things in Ontario. Common law severance pay and statutory severance pay. While they both refer to pay due to employees when their employment has been terminated, entitlements are calculated differently.
Common law severance pay refers to payment in lieu of reasonable notice, while statutory severance pay entitles you to receive one week’s pay for every year of service. While common law entitlements are typically larger than statutory packages, understanding how both are calculated can help you ensure you receive what you’re due if your employment ends.
Who Receives What Kind of Severance Pay?
The first step is understanding who is entitled to what kind of severance pay. Common law severance packages are available to any employee who has not had their employment terminated for just cause or was not subject to a valid termination clause that replaces their common law entitlements.
Meanwhile, statutory severance packages are available to employees who have worked for at least five years with a company with a payroll of more than $2.5 million.
Calculating Common Law Severance Pay
Several factors affect how much an employer should pay a terminated employee under common law severance pays. These include:
- Length of service
- Salary
- Job Title
- Age
- How the employee was recruited
- General economic conditions
Each factor will be examined and weighted in each circumstance. However, the usual maximum range for reasonable notice under common law is two years. This makes calculating the amount of severance pay employees can receive under a common law package difficult.
As a result, employees are usually given a severance package to terminate their employment and request that the package be agreed upon and signed quickly. At this stage, employees should carefully review the package and seek legal advice from an experienced lawyer who can inform them of what they are legally entitled to.
Most employees receive settlement offers much lower than they are legally due. So, seeking legal advice is critical to ensuring you receive everything you’re entitled to and maximizing your severance pay.
Payment in Lieu of Reasonable Notice
While there is no easy formula to determine how much pay an employee is due under common law severance packages, they are entitled to payment in lieu of reasonable notice.
“Reasonable notice” estimates how long an employee would take to find a comparable job. Factors considered will be the employee’s age, salary, job position, and length of service. This period is a minimum of six to 12 weeks, even for employees with minimal service, and can be as long as two years or, on rare occasions, thirty months.
Consequently, payment in lieu of reasonable notice ensures that employees receive compensation for the period as if they had worked through the reasonable notice period.
Statutory Severance Pay
The term “severance package” typically describes the total payout a terminated employee receives and can cover more than one type of severance pay. “Severance pay” is a term defined under the Employment Standards Act that compensates employees for losses when their long-term employment is terminated.
Statutory severance pay covers employees for certain things, such as loss of seniority. To qualify for statutory severance pay, the employee must have worked for the company for at least five years. In addition, the employer must have a payroll of at least $2.5 million or terminate at least 50 employees within six months due to the business closing down.
Employees terminated with cause are not entitled to receive statutory severance pay, given that “cause” is down to willful gross misconduct such as theft, fraud, or violent behaviour. If your role has been terminated with cause, speak to a lawyer to review your case, as you may be able to sue for wrongful dismissal and win damages.
However, if your job has been terminated without cause, you are entitled to a minimum entitlement of statutory severance pay.
Calculating Statutory Severance Pay
The Employment Standards Act sets out the minimum to which a terminated employee without cause is entitled. Companies can terminate without cause so long as they provide the right amount of notice or pay in lieu of notice to compensate individuals for loss of earnings.
The amount employees are entitled to depends on their length of service, so long as they have been employed continuously for at least three months. In these cases, employees are entitled to at least one week’s notice or the same amount of pay in lieu. Once you qualify for statutory severance pay, you will receive one week’s pay for each year’s service with the company, up to a maximum of 8 weeks for eight or more years.
However, businesses can only provide the minimum amount if they include a clause for an enforceable termination provision within the employment contract.
This clause can prove tricky for employers as the provision must be unequivocal and be a legally valid term of the employment agreement. Many companies commit technical violations of the Employment Standards Act, which void the provision.
As a result, it is always worth employees seeking legal advice, even if there is an enforceable termination provision clause within their contract, as it may not have been correctly implemented.
In these cases, or where there is no termination provision in the contract, the employee is entitled to a common law severance package that includes payment in lieu of reasonable notice. This amount usually exceeds the minimums set out in the Employment Standards Act.
In Summary
Understanding the difference between severance packages and pay is essential when your employment has been terminated. In addition, knowing what you’re entitled to when your employment is terminated without cause is necessary.
Losing your job is stressful, so why not consult with Stacey R. Ball, an employment lawyer in Toronto, to help guide you through the legal minefield and ensure you receive everything you’re entitled to with a common law settlement or statutory severance package.