Severance pay (often shortened to ‘severance’) is money paid to an employee who has been terminated from their job without cause. Not all workers in Ontario are entitled to severance pay upon termination. The amount of severance pay to which a person is entitled depends on how long the person has worked for the employer, the employment contract, and the circumstances under which they were terminated.
Who Can Receive Severance Pay?
Under the Employment Standards Act (ESA), the law which outlines the minimum rights of workers and the obligations of employers in Ontario, employers must provide an employee who was terminated without cause with severance pay if:
- The employer has an annual payroll of $2.5 million or more; AND
- The worker has given five or more years of service to the employer.
An employee is not entitled to severance pay if:
- The employer offered the employee reasonable alternative employment, and the employee refused.
- The employee is guilty of wilful misconduct or disobedience or wilful neglect of duty that has not been condoned by the employer.
- The employee refuses to exercise seniority rights to obtain reasonable alternative employment.
- The employee retires and receive an actuarially unreduced pension benefit upon termination.
- The employee is employed under an arrangement where they can choose to work or not work when requested to do so.
- The employee works at a site doing construction, alteration, maintenance or demolition of buildings, structures, roads, sewers, pipes, mains, tunnels, or other works.
The ESA also provides for the framework for the minimum amount of severance an employee must receive if they are entitled to receive it.
How Is Severance Pay Calculated?
Section 58(4) of the ESA states that employees are entitled to a minimum severance that is equal to the employee’s regular wages for a non-overtime work week multiplied by the sum of their years of employment and the completed months of employment divided by 12 (not exceeding 26 weeks).
As an equation:
Employee’s regular wages for a regular work week*(years of employment + (months of employment / 12))
However, the minimum severance to which an employee is entitled can also vary based on the common law.
Under common law, employers must provide employees with reasonable notice of termination without cause. If reasonable notice is not provided, the employee is entitled to salary and benefits in lieu of notice. As explained by an employment severance agreement lawyer, this complicates the minimum entitlement:
“The problem is that the amount of notice to which an employee is entitled is unpredictable. Judge’s ruling on such cases consider a variety of factors and their decisions seem to vary widely. For example, the amount of common law notice awarded to a three year employee at a trial can range between two and twelve months, depending on the circumstances and the judge.”
Can Employers Ignore Minimum Severance in an Employment Contract?
Any term in an employment contract that attempts to lock workers out of their minimum entitlements under the ESA is void. An employment contract that sets out severance that is less than the minimum in the ESA is not valid.
Employers and employees can contract out of the common law severance entitlement, but those agreements are closely scrutinized by the courts and may not pass as being valid.