“Severance” is a word that is thrown around quite haphazardly by employees and employers alike. Have you ever heard someone refer to a package offered to a departing employee as a “severance package”? Or perhaps you know a friend or family member who has been dismissed and went to see a lawyer in order to determine whether the “severance” being offered to them was fair? Although the terms are often used interchangeably, “severance pay”, “termination pay”, and “pay in lieu of notice” each have specific meanings in the context of employment law, and “Severance Pay” often makes up only a small part (if any) of an employee’s total package upon dismissal.
In Ontario, an employee’s termination or separation package can be made up of many different types of payments, including
- statutory notice and/or Termination Pay,
- Severance Pay, and
- common law reasonable notice and/or pay in lieu of notice.
All of these forms of compensation relating to dismissal are separate and distinct concepts. In this article, we will explain each one and the differences between them.
Requirements Pursuant to the Employment Standards Act, 2000 (the “ESA”)
Statutory Notice and/or Termination Pay
The ESA establishes the minimum entitlements and rights of employees in Ontario, covering everything from the established minimum wage to termination of the employment relationship. Except in certain circumstances (such as where an employee is guilty of wilful misconduct, disobedience or wilful neglect of duty), the ESA requires that all employees who have been continuously employed for at least three months with their employer be provided with written notice of termination or Termination Pay in lieu of that notice. For purposes of the ESA, the amount of notice an employee will be entitled to depends solely upon their length of service with the employer, beginning at one week of notice (for those employees with three months to less than one year of employment) and maxing out at eight weeks of notice (for those employees with eight years of service or more). This can be provided as either working notice or Termination Pay.
In addition to statutory notice of termination and/or Termination Pay, an employer may also need to provide an employee with “Severance Pay”. Severance Pay is compensation paid to an employee (where certain criteria are met) when his or her employment is “severed” by their employer – ie. when the employer dismisses the employee (including constructive dismissal), lays the employee off in excess of the time limits contemplated in the ESA or as a result of a permanent discontinuance of the employer’s business at an establishment, or where an employer gives an employee notice of termination and the employee provides notice of resignation that will take effect during the statutory notice period.
Where an employer has severed the employment relationship, it is required to pay Severance Pay to the employee, which is in addition to any statutory notice or Termination Pay, if the employee has been employed for five years or more, and one of two criteria is met:
- The severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or
- The employer has a payroll of $2.5 million or more.
If the above criteria are met, an employee is entitled to receive Severance Pay, which is a payment equivalent to one additional week per completed year of employment, pro-rated for partial years of service. For example, an employee with six years and six months of service with their employer would be entitled to receive six weeks of statutory notice and/or Termination Pay, and 6.5 weeks of Severance Pay. Severance Pay is capped at 26 weeks.
Unless the employee is subject to an enforceable employment agreement which contains a well-drafted termination provision, the requirements set out under the ESA will not represent an employee’s sole entitlements upon dismissal. Remember, the purpose of the ESA is to set out minimum entitlements which cannot be contracted out of – it represents the floor, not the ceiling, in terms of an employee’s rights.
Reasonable Notice at Common Law
If an employee does not have an enforceable employment agreement (or the termination provision contained within is not enforceable), their entitlements will be governed by the common law, which provides, generally speaking, that all employees are entitled to “reasonable notice” of termination. An employee’s entitlement to reasonable notice will typically be quite a bit more than their minimum entitlements set out under the ESA (e.g. compare a 6 year employee who may be entitled to 12.5 weeks of Termination Pay and Severance Pay under the ESA, but to a reasonable notice period of seven months at common law). The length of the reasonable notice period is a complex, individual analysis depending on many factors (not just length of service), but in theory it should represent the length of time it will take an employee to find new employment following their dismissal. There is a common myth that this is one month per year, but that is not the law.
It is important to keep in mind that the common law entitlement to reasonable notice includes statutory notice and/or Termination Pay, as well as Severance Pay; the entitlements under the ESA are not added on top of their common law entitlements. In the example above, the employee’s entitlement to seven months of pay in lieu of notice would include his or her entitlement to 12.5 weeks of Termination Pay and Severance Pay under the ESA.
To recap, an employee whose employment is terminated may be entitled to receive:
- Statutory Notice and/or Termination Pay – the minimum notice or Termination Pay in lieu of notice required pursuant to the ESA, determined based on an employee’s length of service, which can be up to eight weeks.
- Severance Pay – a payment required to be made to qualified employees (in addition to Statutory Notice and/or Termination Pay) under the ESA when an employee’s employment is severed by their employer. This payment can be the equivalent of up to 26 weeks.
- Reasonable Notice at Common Law – notice or pay in lieu of notice provided to an employee whose entitlements on termination are not otherwise set out in an enforceable employment agreement. Reasonable notice at common law includes an employee’s statutory entitlement to notice, Termination Pay and/or Severance Pay under the ESA.
As is hopefully clear from the above, when an employee receives reasonable notice or pay in lieu of notice of the termination of their employment at common law, they are receiving much more than simply Severance Pay. Conversely, an employee who receives Termination Pay pursuant to the ESA may not receive any Severance Pay at all. The distinction between common law reasonable notice, Termination Pay and Severance Pay is important to understand for both employers and employees in order to ensure that an employee’s separation or termination package accurately reflects their full entitlements at law.
We recommend that anyone who loses their job seek legal advice before accepting a separation package, as they may be entitled to much more than what has been offered. The same advice extends to employment agreements, which can significantly impact an employee’s entitlements on termination right from the start of the employment relationship. Unfortunately, we are often consulted by employees when it is too late; they signed a restrictive contract of employment without legal advice and then, when they are dismissed, they understand the rights they gave up when they did so. Our firm has extensive experience advising individuals in these situations. If you have any questions or concerns with respect to a document that your employer has put in front of you, call us before you sign.