“Severance” at common law is tied to the amount of termination notice an employee should be given
What is Severance Pay?
In Ontario, the term “severance pay” could refer to two different things: Common law severance pay, or statutory severance pay. Common law severance pay is payment in lieu of reasonable notice. Statutory severance pay is one week’s pay for every year of service. Common law entitlements to severance pay are usually greater than statutory entitlements. Stacey R. Ball – Employment Lawyer in Toronto can help you regarding your Severance pay issues.
Who gets Which Kind of Severance Pay?
Statutory severance pay is available to employees who have worked for five (5) years or more with an employer who has a $2.5 million-dollar payroll.
Common law severance pay is available to any employee, as long as they were not terminated for just cause and as long as they were not subject to a valid termination clause that replaces their common law entitlements.
EMPLOYMENT STANDARDS ACT
How To Maximize Your Severance Pay?
The severance package that an employer should pay to a terminated employee depends on a number of factors. Relevant factors include, among others: length of service, age, reason for dismissal, the position the employee held within the company, compensation, whether the employee was actively recruited and the general economy. Employers will often present a terminated employee with a severance package and request that they sign the offer quickly. However, employees should carefully review a severance package offer, ideally with legal counsel, prior to signing. An experienced lawyer will be able to inform you of your entitlements under the law, and provide advice on how to maximize your severance pay. Most employees are offered much less severance than they are owed.
Severance exists in provincial legislation in Ontario, in the form of the Employment Standards Act, but common law remedies tend to be much greater for most employees in Ontario. To obtain a common law remedy it is normally best to seek legal counsel. There is no easy calculation to determine the amount of severance that an employee will receive at common law. The factors mentioned above will be weighed and examined in the particular circumstances of each case. That being said, the normal maximum range for common law reasonable notice is between 18 and 24 months. Further, courts in Ontario have found damages for breach of the implied obligation of good faith and fair dealing over and above the 24-month base notice period.
Severance Pay for Terminated Executives
Determining Notice Period for Executives and Entitlement to Bonus and Benefits
While there is a general rule of thumb under the common law that reasonable notice for terminated employees is one month of notice for every year of employment, reasonable notice becomes a more fact intensive analysis when dealing with terminated executives, especially if they had short service within a company. The Ontario Court of Appeal decision of Love v. Acuity Investment Management Inc. reveals some important considerations.
The Plaintiff was a senior VP and shareholder with the Defendant. The shareholder agreement indicated that if the Plaintiff was to be “dismissed without cause”, the Defendant would repurchase the Plaintiff’s shares at the value and date in which the Plaintiff “ceased to be an employee”. The Plaintiff was dismissed without cause after only 2.53 years of service and the Defendant offered a three-month termination package in line with the “rule of thumb”. Litigation proceeded.
The trial judge determined that the Plaintiff was entitled to five months’ notice and that he was able to hold his shares until the end of the notice period.
The Court of Appeal determined that nine months’ notice was more appropriate. The court stated the trial judge placed too much importance on the Plaintiff’s short employment and not enough emphasis on the Plaintiffs high income, equity ownership, high-level role within the company and the difficulties in finding a position of a substantially comparable nature. The court also determined that the Plaintiff “ceased to be an employee” on the termination date.
While employees are entitled to damages equal to the total benefits they would have been given had they worked the notice period, this principal does not apply in the context of a clear contract stating that the employee is not entitled to the benefit over the notice period. Ultimately, this case illustrates that the contractual language was clear enough so as to oust the Plaintiffs entitlement to bonus during the notice period. Other case law in Ontario have provided for the same result of denying benefits over the notice period, however with even more clear and unequivocal language. An good example of limiting language can be seen in the 2004 decision of Kieran v. Ingram Micro Inc., where the employee’s right to stock options ended when the employee “ceases to perform services…without regard to whether [he] continues thereafter to receive any compensatory payments or is paid salary thereby in lieu of notice of termination.” Having such language in both hiring contracts and benefit agreements helps to clarify entitlement to benefits and when they end.
Bonus Entitlements in Severance Pay
Case law in the province has been inconsistent on whether or not employees are entitled to bonuses during the notice period. Generally, employees are entitled to the accrued bonus pay which would have been earned if they remained employed during the notice period. There is an exception however where as part of the employers bonus policy, terminated employees must be “actively employed” during the time that bonus is paid. Case law in Ontario discusses the wording of the “active employment” clauses in bonus policies.
If you are an employee in an executive position, call the office of Stacey Ball to discuss your severance offer.
It should be noted that the term “severance package” is typically used to describe the total payout that a terminated employee will receive. However, “severance pay” is actually a defined term in the Employment Standards Act. It compensates employees for losses (like loss of seniority) that happen when a long-term employee is terminated. In order to qualify for severance pay an employer must have worked for the employer for at least five years and the employer must either have a payroll of $2.5 million or have severed 50+ employees in a six-month period as a result of a business closure.
Relevant cases dealing with severance packages and pay include Wallace v. United Grain Growers Ltd. (1997), 152 D.L.R. (4th) 1, (1997) 3 S.C.R. 701; Suttie v. Metro Transit Operating Co., (1983), 1 C.C.E.L. 123; and Kreager v. Davidson (1992), 44 C.C.E.L. 261. Please note that the above information does not constitute legal advice. It is general information about the law. If you require legal advice and assistance in an employment matter, please contact the experts at Ball Professional Corporation.
Impact of Termination Clauses
A termination clause that purports to restrict an employee’s common law entitlements regarding severance pay (i.e., payment in lieu of reasonable notice), must indicate what the common law entitlements are being replaced with. It is through the termination clause that some employers limit employees to the statutory entitlements regarding severance. It is important to note that the statutory entitlements are the absolute minimum that an employer is required to provide to employees. If the employer attempts to impose a restriction that provides even less than what the employee would be statutorily entitled to, then the termination clause will become void and the employee may be entitled to the common law and payment in lieu of reasonable notice, which is often much greater than the statutory entitlements.
However, the employer does not have to replace the common law entitlements with the statutory entitlements. They may instead choose to replace it with some formula for determining severance pay that falls somewhere between the statutory entitlements and common law. If the employer truly wished to, they could even replace it with a formula that would exceed the common law entitlements.
Calculating Severance Pay in Ontario
The first thing you should do, before signing anything, is contact a lawyer to review the severance package that your employer has offered you. An experienced employment lawyer can tell you if you are receiving all of the entitlements owed to you under the law, and give advice on how to maximize your severance package. Sadly, many employees walk away with less severance than they are owed.
Please note that “severance package” and “severance pay” refer to different things. The term severance package is generally used to describe the total payout that a terminated employee will receive. Severance pay, on the other hand, is a term in the Employment Standards Act. It compensates employees for losses (like loss of seniority) that happen when a long-term employee is fired. In order to qualify for severance pay an employer must have worked for the employer for at least five years and the employer must either have a payroll of $2.5 million or have severed 50+ employees in a six-month period as a result of a business closure.
There are two main scenarios in which Ontarians are terminated; with cause and without cause.
Terminated With Cause
It is a high bar to terminate someone with cause in Canada. Generally, there must be some serious misconduct that harms the employment relationship, such as theft, violence, fraud rising to the level of gross misconduct. The reason for the high bar is that in the event of willful misconduct, an employee will not receive any termination or severance pay. If you are an employee who has been fired for cause, you should absolutely reach out to a lawyer to review the circumstances of your dismissal. You may have a case for wrongful dismissal.
Terminated Without Cause
In Ontario, you can be terminated without cause, so long as your employer provides the appropriate amount of “notice” or “pay in lieu of notice”. The Employment Standards Act sets out minimum entitlements that a terminated employee receives. This is based on the length of service. However, employers are only allowed to provide this minimum amount if they included an enforceable termination provision in your employment contract. This is actually quite tricky for employers. The provision must be explicit, unequivocal and a valid term of the employment agreement. Even technical violations of the Employment Standards Act may render the provision void.
If that happens, or if there is no termination provision at all, the employee is actually entitled to common law reasonable notice. This is usually a much higher amount than the minimums set out in the Employment Standards Act.
When the court determines common law reasonable notice, they will consider such factors as the length of employment, the employee’s position, the reason for dismissal, the employee’s compensation and whether the employer acted fairly and in good faith. These are several examples. The maximum notice period available is typically 24 months, though there are always exceptions for egregious behavior.
Please note that all of these factors would be weighed and the particular circumstances of each case need to be examined to determine the appropriate amount of reasonable notice.
Contact the legal professionals at Ball Professional Corporation for assistance to make sure you receive any entitlements owed to you upon termination.
Common Law: What does Payment in Lieu of Reasonable Notice mean?
If the common law applies, there is no easy and exact formula that will tell employees what their severance entitlement is. First, the “reasonable notice” that an employee is entitled to needs to be determined. “Reasonable notice” attempts to determine approximately how long it would take an employee to become re-employed in a comparable job. The amount of time that will be considered “reasonable notice” will depend on an employee’s age, salary, position, years of service, and more. Typically, reasonable notice very rarely exceeds thirty (30) months and has a minimum of around six (6) to twelve (12) weeks – even for employees who only worked a single hour.
Common law severance pay is payment in lieu of the employee working for the reasonable notice time period. This means that it includes all the compensation the employee would have received had they worked through the entire reasonable notice period.
Severance under the common law is the default unless: 1. An employee is terminated for just cause; or 2. There is a valid termination clause that imposes a different severance formula (such as statutory severance, or another formula somewhere in between the two).
Stacey Reginald Ball is an experienced Toronto employment lawyer with the Ball Professional Corporation. Our office handles various employment law matters, including wrongful dismissal. If you have questions regarding severance pay, please consult a lawyer for advice.
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