Making Sense of Severance: What You Need to Understand About “Severance”

By March 14, 2019 July 19th, 2019 No Comments

Much of a lawyer’s job is to clarify various misconceptions that clients have about the law – i.e., about how our society addresses problems that people commonly encounter.  Legal jargon can seem almost intentionally designed to confuse, and the terminology we use the area of employment and labour law is no exception. Today, I’ll take some time to address a source of confusion that Canadians will very likely encounter at some point, perhaps many, in their lives: the concept of ‘severance’.

How one might stumble over this innocuous term can be illustrated in one simple sentence: “Your severance package may or may not include severance pay.”

As the above suggests, severance pay and a severance package are distinct concepts, but they are both frequently referred to only as ‘severance’.  Yes, an easy solution might be for people – namely, professionals – to simply start specifying exactly what we mean, but, frankly, we humans love shortcuts.  Using jargon also signals to others that we know what we’re talking about, so it can be very tempting to use it, even at the expense of clarity. Since all of that is unlikely to change, let’s take a moment to unpack these terms.

What is a Severance Package

A severance package, generally speaking, is what an employee is given upon being dismissed (without cause) from a job.  It consists primarily of a sum of money, paid either in a lump sum or as regular salary continuance, that is meant to cushion the blow of the job loss by providing some limited income while you search for a new job.  These payments can be framed in a few different ways, which can affect both the tax treatment of the payout and whether the payment will be affected by the employee “mitigating their damages” by obtaining a new job.

Typically, a severance package also requires the employer to maintain any benefits the employee had, for a specific period of time.  If there remain unpaid wages, or vacation pay, these can also be addressed in a severance package. A good lawyer is often essential to ensuring that the negotiations don’t leave you with less than you’re entitled to, and to minimizing your tax liability – that is, how much of the payout ends up in your pocket, rather than the government’s.  Remember, an employer has an interest in you accepting what is on offer, as it almost always comes with the condition that you also sign a Full and Final Release, by which you essentially agree to never sue them for a greater sum.

The focus of this severance package negotiation is very often on how long the former employee will continue to be provided with pay or benefits.  This depends primarily on whether the Employment Standards Act’s (ESA’s) statutory minimum requirements apply, or if the employee is entitled to ‘common law reasonable notice’.  The latter is preferable, as it entitles the employee to a significantly larger payout. Which regime applies depends, in turn, on what it says in the employment contract between employer and employee.  It is in cases where the ESA applies that the second meaning of ‘severance’ comes into play. A creature of statute, severance pay is a much narrower concept than that of the severance package.

What is Severance Pay

Where the employment contract validly limits an employee’s entitlement to the ESA minimums – which is a question very much worth exploring with the help of a qualified employment and labour lawyer – that employee will be paid (and enjoy benefits continuance, if applicable) based solely on the length of their service with the employer.  The more years you spent at a job, the longer the payout. ‘Termination pay’ is the basic amount, providing you one week’s pay per full year of service. If, however, you worked at your job for more than five years, you are entitled to ‘severance pay’. This version of severance thus refers simply to the additional one week of pay per full year of service to which you are entitled after passing that five year work-anniversary.

So, depending on whether the ESA applies, and on how long you worked at your job, your severance package may, indeed, not include severance pay.  

To keep these concepts straight is to understand basic terms that are absolutely vital to getting what you are entitled to upon job loss.  Losing a job is difficult enough without being taken advantage of. Many employees, sadly, do accept less than they should, and few things are more disheartening for a lawyer to hear than that a client has signed away their rights.   Before signing anything, one would almost always be wise to seek professional advice. The lawyers at Tailor Law are ready to provide the advice and advocacy you need to secure the best possible outcome. To schedule a free in-person or phone consultation, please reach out to our office at 905-366-0202, or contact us through our website, here.

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