In the world of business, challenges come in various forms, and one that inevitably crosses the path of every business owner is the matter of employment severance. Understanding your obligations and rights when it comes to severance pay is very important. In this guide, we’ll simplify the complexities of severance pay. Whether you’re an experienced business owner or just starting out, grasping these essential concepts is fundamental for the sustained success of your enterprise. 

Overview of severance pay

Employees and dependent contractors have an automatic entitlement to severance pay if their employers terminate their employment, in addition to any obligatory individual or collective notice of termination. An employee qualifies for severance pay when their employment is “severed” and they have accumulated a minimum of five years of service with the employer, encompassing all time worked for the employer, regardless of its continuity or activity, and their employer either maintains a total global payroll of at least $2.5 million or has terminated the employment of 50 or more employees within a six-month period due to the permanent closure of all or part of the business. 

In Ontario, meeting these conditions entitles an employee who is terminated without just cause to receive one week of pay for each year of service, up to a maximum of twenty-six weeks. Special provisions apply in cases of mass terminations, such as plant closures, where fifty or more employees are let go within a six-month period, making severance pay applicable irrespective of the employer’s annual payroll size. 

Severance pay is a mandatory requirement for employers in Canada only within the jurisdictions of Ontario and the federal government when an employee’s employment is terminated. 

Severance pay and termination compensation 

Although they are usually confounded, severance pay is different from termination compensation. Termination compensation is any form of payment required to proceed with an employee’s termination of employment. Severance pay is a compensation for long-serving employees. Statutory severance pay is contingent on the employee’s length of service, the employer’s payroll size, and specific circumstances involving the number of employees being terminated.

The Employment Standards Act, 2000 set specific conditions for the payment of severance pay. It must be provided to the employee no later than seven days following the termination of employment or on the next scheduled regular payment day. It is paid separately from termination compensation.

When employment ends due to reasons like involuntary resignation, dismissal for cause, or termination without cause, it’s common for employment standards officers or courts to step in and address disputes related to claims for termination pay, severance pay, or compensation in place of notice. Under common law principles, the calculation of termination compensation encompasses the entirety of the employee’s compensation package. In simpler terms, this calculation includes not just the base salary but also considers factors such as:

• Commissions
• Health care benefits
• Life insurance
• Car allowances
• Bonuses
• Share options
• Pensions

Calculating severance pay

To determine severance pay owed to an employee, multiply their standard weekly wages by the total of:

• The years of completed employment, plus
• The months of completed employment divided by 12 for an incomplete year.

The highest amount of severance pays mandated by the Employment Standards Act, 2000 is 26 weeks (about 6 months).

Determining severance pay and employment contracts

To minimize the chances of disputes and the potential financial liability associated with non-fault terminations, it is prudent to outline a precise formula for severance pay, and other aspects of termination compensation as well, in employment contracts. Additionally, exclude any considerations for common law damages within the contract. 

This formula should align with the minimum standards stipulated for notice of termination or severance pay, where applicable, under the Employment Standards Act, 2000. In the case of fixed-term contracts, it’s essential to address the prospect of early termination by specifying an exact amount or formula. This safeguards against the employer’s liability for the entire duration of the contract. For instance, if an employer enters a three-year fixed-term contract and later determines that the employee is no longer required after just six months, without an explicit clause addressing non-fault termination compensation before the contract’s three-year term concludes, the employer may be obligated to pay the employee for the remaining thirty months. 

It’s vital to distinguish between the minimum notice or termination pay mandated by the Employment Standards Act, 2000, which is solely based on the employee’s years of service, and the factors considered by courts in claims for damages under common law in cases of wrongful dismissal lawsuits. Additionally, it is advisable to consult with an employment lawyer when preparing your employment contracts to ensure they meet legal standards and protect your business interests. 

Understanding reasonable notice

Within the context of Ontario Employment Law, establishing reasonable notice, which is the advance notification an employer must provide to an employee prior to termination, involves the examination of various critical elements by the courts: 

• Length of service: Longer tenure often warrants longer notice periods, allowing employees more time to secure new employment.
• Age: The age of the employee can impact their ease of finding new work, with older employees potentially requiring longer notice.
• Education and qualifications: An employee’s education and qualifications influence their employability; specialized skills may necessitate longer notice.
• Position: High-ranking executives or key personnel might require extended notice to transition effectively.
• Work experience: Extensive industry experience can be an asset, leading to a longer reasonable notice period.
• Skill set: Unique and in-demand skills might require a longer notice period to find a suitable replacement position.

Courts consider these factors to ensure that employees receive sufficient time and support to transition to new employment opportunities while considering their individual circumstances.  They also consider if employees have followed the employment law. The Employment Standards Act establishes that employees who have been given a written notice of termination are entitled to the right to severance pay if they give their employer two weeks’ written notice of their resignation. A failure to provide this letter may turn a potential case in the employer’s favor.

Termination of employment without just cause

In cases where an employee’s termination is not for just cause, employers have several options, including providing working notice, offering termination pay instead of notice, or a combination of both. However, it’s important to note that working notice may be rendered unenforceable by the courts if the employee can demonstrate a hostile work environment or undue embarrassment during the notice period. In situations where working notice is provided, it’s mandatory, under the Employment Standards Act, 2000, to also make a separate payment for severance pay, if applicable.  

It is important to note that altering significant terms or conditions in an employment agreement without the employee’s consent or without providing the employee with a benefit in exchange is unenforceable and may result in a claim of constructive dismissal.