While the terms “severance pay” or “severance package” may be familiar to most people, the legal definition of these terms, the eligibility criteria for receiving severance pay, the amount of severance pay entitlement and the factors that impact how severance pay is calculated are not widely known.
If you’ve been terminated without cause from your employment or are negotiating a new employment contract, you need to know the factors that can increase your severance pay to give you as much financial support as possible in case the worst happens.
What is Severance Pay, Actually?
Technically, the law in Ontario states that to be eligible for severance pay, an employee must have worked with their employer for at least five years and they were either:
- Dismissed or stopped being employed by the employer (even in the case of bankruptcy.)
- Constructively dismissed by the employee and resigned within a reasonable time.
- Laid off for 35 weeks or more in any period of 52 consecutive weeks.
- Laid off because the business was closing, or
- Given notice of termination but resigned before the notice period ended.
Also, to qualify for severance pay, your employer must:
- Have a global payroll of at least $2.5 million; or
- Have severed the employment of (laid off) 50 or more employees in a six-month period because all or part of the business permanently closed.
The term “severance pay” is commonly used to refer to a severance package which includes severance pay added to an employee’s termination pay.
Termination Pay – A Factor that Increases Your Severance Package
In the event of an employee’s termination without cause, they are entitled to receive sufficient notice of termination or pay in lieu of notice in the amount they would have made during that “notice period.” That pay is known as “termination pay.”
The Employment Standards Act (ESA) mandates that employers provide employees with a minimum notice of termination or payment in lieu of notice in the amount of one week’s notice for every year of service once you’ve passed the probationary period.
Keep in mind that these minimum notice periods only apply if your employment contract explicitly and legally states that you’re entitled only to the notice period specified by the Employment Standards Act upon termination.
However, if you didn’t sign a contract or your contract doesn’t address termination notice, or if the notice clause is unenforceable or illegal, you may actually be entitled to more notice or termination pay than what’s stated in the ESA.
Severance Pay Increases Under the Common Law
If you don’t have an employment contract, or if your contract has a notice period or termination clause that’s unenforceable, then the minimum notice periods set out in the Employment Standards Act won’t apply to you. Instead, your entitlement to notice/severance may be determined by the principles of common law, which are based on previous court decisions in similar cases.
Unlike the ESA, common law principles don’t provide a specific formula for calculating how much notice is reasonable. Instead, a judge or lawyers negotiating a settlement will consider various factors, including how long it would take you to find a comparable job.
The duration of a common law notice period takes into account various factors, such as:
- The employee’s age.
- Their length of service and their position.
- The availability of comparable job opportunities.
- Economic conditions.
- If the employee held a specialized role.
Typically, common law notice periods are more generous than statutory notice periods in the ESA or those stated in employment contracts. That’s one reason why it is always advisable to have an employment lawyer review your employment contract, even if you have already signed it.