Severance packages are offered when an employer seeks to end an employment relation absent of misconduct. Severance packages are given in lieu of termination notice, often referred to as notice pay. There are a number of factors to consider when evaluating whether an employer is offering a generous severance package or simply the bare minimum.
Minimal Entitlements:
An employee’s minimal entitlement will be defined by the jurisdiction in which they work and the terms of their employment contract. Each province is governed by separate employment standards acts, while employees within federal jurisdiction are governed by federal law (Canada Labour Code). For employees under Ontario jurisdiction, severance packages are generally 1 week’s worth of earnings for each year of employment, to a maximum of 8 weeks. The additional severance payment is required if an employee has worked for 5 years or more, and the employer’s payroll is at least 2.5 million. This additional severance payment is 1 week of earnings for each year of service to a maximum of 26 weeks. The total notice must be inclusive of all benefits. There are variations, however, according to each province’s legislation with Ontario legislation being on the more generous side in comparison.
Above-Minimal Entitlements (Common Law Notice):
Some employees would be limited to minimal entitlements if their employment contract contains a termination clause to this effect. But for the rest of employees that are not, the common law would apply. Common law notice pay is generally more generous than minimal guarantees under employment law. In general, employees would be entitled to one month per each continuous year of service, inclusive of all wages and benefits. Common law notice pay is an estimate of the time it would take an employee to find comparable employment – age, length of service, and skillset are a few key factors determining the amount of notice pay at common law.
All severance pay must be inclusive of all benefits and wages, which includes non-discretionary bonuses (incentive pay subject to a formula or guaranteed bonuses, for example). Benefits such as RRSP contributions, car allowances, and group benefits are also included, as well as any other benefits part of an employee’s compensation.
As the above demonstrates, evaluating how much severance pay one is entitled to on the higher end of the spectrum (i.e common law) can be complex and difficult. Employees should always seek the advice of an employment lawyer in determining whether the severance package offered by their employer is fair and/or generous, or simply only meets the bare minimum requirements before agreeing to any terms.