What is Severance Pay?
Severance Pay is an entitlement guaranteed to those whose employment has been “severed”. It is compensation designed to make up for the losses the employee will likely incur (e.g. loss of seniority). When providing severance, you may offer an employee additional benefits. Severance is often referred to as a Severance Package, Severance Agreement, or Retiring Allowance.
Things to consider when providing Severance Pay include:
- Period of Employment
- The amount of notice you must provide based on the Period of Employment
- Termination Pay
The ESA defines Severance Pay as “compensation paid by an employer to a qualified employee who has their employment severed.”
Therefore, you are severing employment if the employee:
- Is laid off
- Terminated without cause
- Resigns due to Constructive Dismissal
An employee may also qualify for severance if they:
- Have worked for you for five or more years
- The company’s global payroll exceeds $2.5 million (now based on the global payroll
- You’re severing the employment of 50 or more workers within six months.
The maximum amount of severance pay required to be paid under the ESA is 26 weeks.
When to pay
As an employer, you’re required to pay an employee severance within seven days after the employment is severed or whichever point the employees next pay day would be – whichever comes later.
An employer may pay severance in installments in accordance with the electronic or written agreement of the employee or the approval of the Director of Employment Standards, Ministry of Labour, Immigration, Training and Skills Development. However, the plan cannot last be for more than three years. And if an employer fails to make a scheduled payment, all of the employee’s severance pay becomes due immediately.
Severance pay exceptions
Exceptions to Severance Pay entitlements include:
- The employee refuses an offer of “reasonable alternative employment”
- Employment is severed and the employee chooses to retire on a full pension with full recognition of all years of service that would have otherwise been worked (Canada Pension Plan benefits do not apply in this case).
- The employee refuses “reasonable alternative employment” through a seniority system.
- The economic effects of a strike cause permanent closure to all or parts of the business – in turn resulting in loss of employment.
- Construction industry employees who work off site and are typically associated with work or collective bargaining with other employees who work at a construction site.
- Those employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works.
- Those guilty of serious wilful misconduct, disobedience, or wilful neglect of duty.
- The employee has lost their employment because the contract of employment is impossible to perform or they have become frustrated by an unexpected or unforeseen event or circumstance. Bankruptcy or insolvency does not apply.
Still need help understanding Severance Pay?
If an employee is entitled to Severance Pay, it’s essential you provide it. Failure to do so could result in a Wrongful Dismissal claim and issues with the Employment Standards Act (ESA) in Ontario. If you need help doing so, Employer Line is here to help. Call Employer Line today at 1-833-247-3650 and an expert will be happy to walk you through how to provide and calculate Severance Pay.