“Severance” is a word that often arises when employment ends. In my work I mostly see the word severance come up in a question: Am I required to pay a severance package? Should I be getting more severance? Is this severance package fair? To many people “severance” is a mystery.
Although the terms “termination pay”, “statutory pay”, “pay in lieu of notice” and “severance package” each have specific meanings, they are often used interchangeably. As a result, I find there is a lot of confusion surrounding these terms. This article will explain some of the differences between them.
Before I get into the differences, it is important to note that employers always have the option of providing working notice of termination. If they do not want to provide working notice, employers can decide to pay money to terminate on a specific date (usually immediately). This article is mostly talking about payments, not working notice.
“Termination pay” and “statutory pay” usually refer to the pay employees are entitled to receive under the Employment Standards Code (the “Code”). Termination pay and statutory pay are based solely upon the length of an employee’s service with the employer and max out at 8 weeks’ wages if an employee has been employed for 10 years or longer.
“Pay in lieu of notice” usually refers to pay an employee is entitled to receive under the common law doctrine of “reasonable notice”. If an employee does not have an enforceable employment agreement excluding reasonable notice, employees are entitled to reasonable notice. If an employer decides to pay money instead of providing reasonable working notice, that pay is called “pay in lieu of notice” and the amount will typically be much higher than statutory pay. There is a common myth that this works out to one month per year of service, but that is not law. The amount is mainly based on four factors – age, length of service, character of employment, and availability of similar employment – and will vary from person to person and job to job.
A “severance package” refers to all aspects of compensation payable to an employee. Severance packages account for things like termination pay, salary, wages, and commissions, but also other matters like pensions, RRSP contributions, medical and dental benefits, fringe benefits (vehicles, cellphones, gym memberships, etc…), and vacation pay. Severance packages are something to be negotiated between employee and employer and can serve the interests of both parties. A carefully negotiated severance package signed by an employee with independent legal advice provides employers certainty and minimizes legal liability (typically because the employee signs a document agreeing not to sue the employer later). Employees can also benefit by bargaining for more than just money and negotiating how they receive their pay. Termination pay and pay in lieu are taxable, and deductions must be taken for income tax, CPP, and EI. Employees may use a severance package as an opportunity to request their employer to transfer settlement fund directly to RRSPs to defer tax or use other methods to time
payments to limit their tax exposure. Negotiating a severance package keeps control in the hands of employers and employees and helps maximize benefits.
Whether you’re an employee or an employer it is important that “severance” not remain a mystery. Unless dismissal is for “cause” (a topic for another article), then it should always be treated as a negotiation. There is rarely a downside to carefully and thoughtfully negotiating a severance package. If you find yourself asking severance-related questions, your best ally is legal advice. If you want to ensure you are being offered – or are offering – a fair severance package, make sure you obtain appropriate legal and financial advice.