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.

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.

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.

In Summary

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.