A Guide to Severance Pay Under the Employment Standards Act, 2000

 

The Employment Standards Act, 2000 (the “ESA”) obligates employers to provide employees with severance pay under certain circumstances. “Severance pay” is compensation that is paid to an employee who has had his or her employment “severed”. A person’s employment is “severed” when their employer:

• dismisses or stops employing the employee, including where an employee is no longer employed due to the bankruptcy or insolvency of their employer;
• “constructively” dismisses the employee and the employee resigns in response within a reasonable time;
• lays the employee off for thirty-five or more weeks in a period of fifty-two consecutive weeks;
• lays the employee off because all of the business at an establishment closes permanently; or,
• gives the employee written notice of termination and in response the employee resigns after giving two weeks’ written notice, and the resignation takes effect during the statutory notice period.

Severance pay is not the same as termination pay, which is given in place of the required notice of termination of employment.

An employee qualifies for severance pay if their employment is severed and she or he (i) has worked for their employer for five or more years (including all time spent by the employee in employment with the employer, whether continuous or not and whether active or not), and (ii) the employer (a) has a payroll in Ontario of at least $2.5 million, or (b) severed the employment of fifty or more employees in a six-month period because all or part of the business permanently closed.

To calculate the amount of severance pay an employee is entitled to receive, multiply the employee’s regular wages for a regular work week by the sum of:

1. the number of completed years of employment; and,
2. the number of completed months of employment divided by twelve for a year that is not completed.

The maximum amount of severance pay required to be paid under the ESA is twenty-six weeks.

An employee must receive severance pay either seven days after their employment is severed or on what would have been their next regular pay day, whichever is later in a lump sum. However, an employer may pay severance pay in installments with the electronic or written agreement of the employee or the approval of the Director of Employment Standards of the Ministry of Labour. An installment plan cannot be for more than three years, however, and if an employer fails to make a scheduled payment, all of the employee’s severance pay becomes due immediately.

There are some exemptions from severance pay. An employee is not entitled to severance pay if she or he:

• has refused an offer of “reasonable alternative employment” with the employer;
• has refused “reasonable alternative employment” that is available to them through a seniority system;
• has their employment severed and retires on a full pension recognizing all years of service that would have been worked in the normal course;
• has their employment severed because of a permanent closure of all or part of the employer’s business that the employer can show was caused by the economic effects of a strike;
• is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and was not condoned by the employer; or,
• has lost their employment because the contract of employment is impossible to perform or has been frustrated by an unexpected or unforeseen event or circumstance.

The rules under the ESA governing termination and severance of employment are minimum requirements. Some employees may have additional rights under the common law or other legislation.

The above guidelines are provided for general information only. As each situation is unique an advice by an experienced employment lawyer is equally important to Employers and Employees.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. Whether you are an employer or an employee, we can help. Contact us to see how.

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