Severance Pay: Not the Same as Termination Pay

Employment Termination Pay -- Woman with Pink Slip

Oftentimes, a “termination package” will use the terms “notice” (“pay in lieu of notice” or “termination pay”) and “severance” interchangeably, although they are technically distinct. In certain circumstances, severance may be owed in addition to termination pay depending on the company’s annual payroll and on how long the employee worked for the company.

What’s the Purpose of Severance Pay?

In the context of statutory employment standards, severance compensates an employee for accumulated seniority and loss of the job. Ontario Nurses’ Association v. Mount Sinai Hospital [2005] O.J. No. 1739 states that “severance pay (in contrast to termination pay or pay in lieu of notice) is an earned benefit that compensates long-serving employees for their past services and for their investment in the employer’s business.”

Who Qualifies for Severance Pay?

Severance is only available when certain conditions are met. In order to receive severance pay, an employee must have worked for the company for 5 years or more and the employer must have a total annual payroll of $2.5 million or greater.

An employee who has worked for a company less than 5 years may also be entitled to severance pay if the termination occurred because of a permanent discontinuance of all or part of the employer’s business, and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result.

How Much Severance is Owed?

As a general rule, the statutory minimum for severance pay is calculated as follows:

the employee’s regular wages for a regular work week x the sum of: (a) the number of years of employment the employee has completed, and(b) the number of months of employment above the number of years worked, divided by 12.

For example, if the employee has worked for 6 years and 4 months at a regular weekly pay of $500, severance pay owed would total $3,166.67, or $500 x (6 + 0.33= 6.33)

Although statutory minimums for severance pay and termination pay do exist, the minimums usually represent only a small portion of an employee’s total notice entitlement, the larger additional portion being common law notice. Consulting with an employment lawyer is the best way to determine an employee’s full entitlement to severance pay.

For related case studies and more information on Severance Pay and Termination Pay, search our blog.

More Concepts on Employment Terminations

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