What is Severance Pay?
Severance Pay is payment offered when an employee’s payment has been severed. Severance is designed to compensate for losses the employee will likely incur (e.g. loss of seniority). When providing severance, you may offer an employee additional benefits.
Severance is often called a:
- Severance Package.
- Severance Agreement.
- Retiring Allowance.
When providing severance pay, it’s essential you take into account the period of employment, the amount of notice you must provide, and termination payment entitlements. You are severing employment if an employee is laid off, terminated without cause or the employee resigns due to a 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 must pay an employee severance within seven days after the employment is severed or whichever point the employee’s next payday 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. However, the plan cannot last for more than three years. If an employer fails to make a scheduled payment, all of the employee’s severance pay becomes immediately due.
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.
- The economic effects of a strike cause permanent closure to all or parts of the business.
- Construction industry employees who work off-site and are associated with collective bargaining.
- Those employed in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, or tunnels.
- Employees who are guilty of serious wilful misconduct, disobedience, or wilful neglect of duty.
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.