Severance Pay

Are you thinking of terminating one of your employees? As an employer, you must meet the minimum standards set by the Employment Standards Act (ESA). Especially when it comes to employee dismissals, you should think about:

  • Amount of notice;
  • Length of employment;
  • Termination pay; and
  • Severance pay, if required.

What is severance pay?

By definition in the ESA, severance pay is “compensation that is paid by an employer to a qualified employee who has their employment severed“. What this means for employers is, you are severing employment when your employees are:

  1. Laid off
  2. Terminated for reasons other than firing-for-cause
  3. Resigning due to constructive dismissal

For these reasons, severance pay is different than termination pay, which is compensation in the place of termination notice. The purpose of severance is for employers to compensate employees for their years of service. It is also referenced to terms alike, such as severance package, severance agreement, or retirement allowance.

How does severance pay work?

In addition to termination pay, there are three reasons to provide severance:

  1. Your employee has worked for five or more years (whether active, inactive, continuous or not);
  2. Your payroll exceeds $2.5 million; or
  3. You are severing employment of 50 or more workers within a six-month period because your all or part of your business is permanently closed.

Calculating and Paying Severance

To calculate the amount of severance an employee is owed, you take their: regular week’s wage x (number of completed employment years + number of months of an incomplete year, divided by 12).

For example, John has worked for your company for 5 years and 6 months. Therefore, he is owed his regular week’s wage x 5.5.

Note that, under the ESA, the maximum amount of severance required is up to 26 weeks of pay.

Do you understand your obligations around termination and severance?

Termination of employment, termination pay and severance pay can be confusing. This is a common topic that employers ask about, alongside definitions for wrongful dismissals, constructive dismissals, mass terminations, and alike terms. If you have questions, ask an HR expert. Call Employer Line’s advice line – it’s complimentary, open 24/7, and you get the support you need from a human resources professional. Call us today at 1(833) 247-3650.