What is Severance Pay?
An employee’s employment is considered severed if they are dismissed or their employment is stopped, including where an employee is no longer employed due to the bankruptcy or insolvency of their employer.
Severance pay is the payment given to qualified employees who lose their job due to reasons such as insolvency of the employer, closure of business, or constructive dismissal, with an aim of compensating for the loss.
**Note: It’s important to note that severance pay differs from termination pay, which is provided to employees if they have been continuously employed for at least three months and the total amount provided depends on their period of employment. The following article speaks ONLY of severance pay. If you are in doubt about your responsibilities regarding notice of termination, or pay in lieu of notice, under the ESA, please speak with your HR advisor.
Conditions for Qualifying for Severance Pay
Severance occurs when:
- An employer terminates an employee’s employment due to the bankruptcy or insolvency of their employer.
- An employee resigns due to constructive dismissal within a reasonable timeframe.
- An employee has been laid off for 35 or more weeks within 52 consecutive weeks.
- An employee resigns after giving two weeks’ written notice, and the resignation takes effect during the statutory notice period.
To qualify for severance pay, an employee must have worked for the employer for five or more years, and their employer must have a global payroll of at least $2.5 million or have severed the employment of 50 or more employees in a six-month period because all or part of the business permanently closed.
The Employment Standards Program policy previously required that employers have an Ontario payroll of at least $2.5 million to meet the payroll condition. However, the policy was modified in response to a court ruling. As a result, the payroll condition now pertains to the employer’s global payroll.
Calculating Severance Pay in Ontario
There is a formula for calculating severance pay that can help inform employers.
To determine an employee’s severance pay, multiply their regular wages for a regular work week by the sum of the following:
- the number of completed years of employment, and
- the number of completed months of employment divided by 12 for a year that is not completed.
The maximum amount of severance pay required to be paid under the ESA is 26 weeks.
It is important to note that a special method of calculating severance pay is used for employees who are paid on a basis other than time worked. In addition, recent case law can influence what a lawyer or HR professional would recommend as severance. Please seek assistance from an HR advisor at HR Covered any time.
Payment and Distribution of Severance Pay
Severance pay must be provided to employees either seven days after their employment has been severed or on their next scheduled payday, whichever is latest. Employers are permitted to provide severance pay in instalments, subject to the written or electronic consent of the employee or the approval of the Director of Employment Standards at the Ministry of Labour, Immigration, Training and Skills Development. The instalment plan may not exceed three years, and if the employer misses a scheduled payment, the employee is entitled to all of their severance pay immediately.
Exemptions from Severance Pay
An employee is not eligible to receive severance pay under the following conditions:
- They have declined an offer of “reasonable alternative employment” with the employer.
- They have refused “reasonable alternative employment” that is available to the employee through a seniority system.
- They have had their employment severed and retired on a full pension recognizing all years of service that would have been worked in the normal course of employment, with the exception of Canada Pension Plan benefits.
- They have had their employment severed because of a permanent closure of all or part of the employer’s business that the employer can show was caused by the economic effects of a strike.
- They are employed in construction, including employees who are working off-site and who are commonly associated in work or collective bargaining with employees who work at the construction site.
- They are employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels, or other works.
- They are guilty of wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and was not condoned by the employer.
- They have lost their employment because the contract of employment is impossible to perform or has been frustrated by an unexpected or unforeseen event or circumstance, except when the contract is frustrated or impossible to perform as the result of an injury or illness suffered by an employee or due to bankruptcy or insolvency.
The exemptions listed above are often intricate and may require further clarification. If you require assistance with understanding these exemptions, please consult an HR advisor.
If you are an HR Covered client, click here to book a quick appointment with your account manager.
Additionally, you can also refer to the special rule tool for further guidance.
Qualifying for severance pay and calculating the amount of severance pay can be complex, and it is important to consult with an employment lawyer or human resources professional to ensure compliance with relevant employment standards legislation.