What Are Severance Packages And How It Works?

If you have been terminated or dismissed without cause (through no fault of your own), you are entitled to pay in lieu of notice also known as severance pay. Its purpose is to compensate an employee for losses (such as loss of seniority) that occur as a result of the dismissal. Severance pay is different from termination pay.

The severance agreement between you and your employer will outline the financial terms on which you will leave the company. Severance pay is only one component of the entire severance package which may also include:

  • Insurance coverage
  • Retirement or pension plans
  • Stock
  • Company perks (for example, laptop or equipment)
  • Announcement of departure
  • Assistance finding another job
  • Recommendation letter

When are you entitled to severance pay and packages?

Under common law, you have 2 years from the moment of termination to pursue full severance pay from your former employer. This is known as a limitation period.

An employee qualifies for severance pay if:

  • They have worked for the employer for at least 5 years, regardless of whether the employment was continuous or active during those years

Employment is “severed” when the employer:

  • Dismisses or stops employing the employee, including in situations where an employer becomes bankrupt or insolvent
  • “Constructively” dismisses the employee and the employee resigns in response within a reasonable time
  • Lays off the employee for 35 or more weeks in a period of 52 consecutive weeks
  • When the employee is unavailable or unable to work, suspended for disciplinary reasons, or not provided with work because of a strike or lockout do not count
  • Lays off the employee because the business closes permanently, or the employee receives a written notice of termination from the employer, resigns after giving two weeks’ written notice, and the resignation takes effect during the statutory notice period

Amount of severance pay

Under the Employment Standards Act, employers are required to pay employees up to a maximum amount of 26 weeks of severance pay. To calculate the amount of severance pay, multiply the employee’s regular wages during a typical workweek by the sum of:

1) The number of completed years of employment; and

2) The number of completed months of employment divided by 12 for a year that is not completed

When is an employee not entitled to severance pay?

Examples of circumstances where an employee is not entitled to severance include:

  1. If the employee is not a long-term employee and has only worked for the employer for a short period of time (less than 5 years)
  2. If the employee has refused an offer of “reasonable alternative employment” with the employer
  3. If the employee is still able to retire on a full pension which recognizes all years of service that would have been worked, excluding Canada Pension Plan benefits
  4. If the employee is employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works
  5. If the employee is guilty of wilful misconduct, disobedience or wilful neglect
  6. If the contract of employment is impossible to perform or has been frustrated by an unexpected or unforeseen event or circumstance, excluding bankruptcy or insolvency

COVID-19 Update on Severance Pay

Under The Infectious Disease Emergency Leave Regulation, an employee is not considered to be laid off if their employer temporarily reduces or eliminates their hours of work for reasons related to COVID-19. Since an employee must be laid off without cause to trigger severance pay, this means that the employee cannot use COVID-19 as an entitlement to severance pay.

We understand that negotiating a severance package is a difficult time in your life. However, it can make up for potential future losses and allow you to have a fresh start if you lose your job. Consult a legal professional for guidance.

Nothing in this article should be considered or relied on as legal advice or opinion. This article only provides general information and should you require assistance, please contact ourselves to book a free initial consultation 905-366-0202 or through our website here

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