An Update on Severance Pay.
Terminating an employee is a step that no employer should take lightly. For most employers, terminations arguably present the most risk from a legal and compliance perspective than at any other point in the typical employer/employee relationship. Although it’s true that an employer doesn’t have to provide a reason to terminate an employee in Ontario under the Employment Standards Act (ESA) – it does not mean that the circumstances behind a potential termination do not have to be carefully reviewed before an employer makes their final decision.
As can be inferred from the above, termination in Ontario is a complex topic and a matter in which an employer should seek professional assistance. Please do not hesitate to contact a member of the HRPAR team if your organization requires help with a termination issue.
Today’s post will focus on an important area of employee terminations, and one which has been very recently, and dramatically, updated in Ontario: severance pay.
Severance pay is compensation that is paid to a qualified employee who has their employment “severed.” It compensates an employee for losses (such as loss of seniority) that occur when a long-term employee loses their job. What’s crucially important to know is that severance pay is not the same as termination pay. Not everyone is entitled to severance pay when they are terminated from their position – however – effectively all employees who have completed 3 months of continuous service are entitled to notice of their termination, or pay in lieu of this notice (called termination pay) under the ESA. The length of notice that an employee must be given depends on their years of service as listed in the ESA. So how does severance pay differ? The Ontario Superior Court of Justice (Divisional Court), in the recent case of Hawkes v. Max Aicher (North America) Limited, has provided a controversial decision on severance pay. In essence, the decision has updated the eligibility criteria as follows:
The employee has:
- worked for the employer for five or more years (including all the time spent by the employee in employment with the employer, whether continuous or not and whether active or not) and
- their employer:
- has a payroll of at least $2.5 million globally;
or
- severed the employment of 50 or more employees in a six-month period because all or part of the business permanently closed.
The only change the Court has made is to the payroll criteria in bold above, but it is a critical one. Up until this decision, it was understood that only an organization that had a payroll of at least $2.5 million in Ontario (not globally) would be required to pay severance pay if all the other conditions above are met. This decision therefore has far-reaching implications on employers that may have a small presence in Ontario but a large presence extra-provincially and/or internationally. Such employers will now have to pay severance pay, if applicable, to a terminated employee. So how costly could this be for organizations that didn’t have this problem before?
To calculate the amount of severance pay an employee is entitled to receive under the ESA, you must multiply the employee’s regular wages for a regular work week by the sum of:
- the number of completed years of employment;
and
- the number of completed months of employment divided by 12 for a year that is not completed.
The maximum amount of severance pay required to be paid under the ESA is 26 weeks.
EXAMPLE:
Employee A works 40 hours a week at a rate of $20.00 an hour. They are being terminated after 10 years, 9 months and 3 weeks of service.
- Employee A’s regular wages for a regular work week are ($20.00 x 40) = $800.00.
- Employee A’s completed years of service is 10 years.
- Employee A’s completed months of service is 9 months. We divide this by 12 to get 0.75.
- The sum of Employee A’s completed years of employment and completed months of employment divided by 12 is (10 + 0.75 = 10.75).
- Employee A is entitled to be paid 10.75 x $800.00 as ESA severance pay = $8,600.00.
As can be seen, the cost implications of this decision may be huge for an employer.
HRPAR understands the legal and financial consequences that a termination may bring. We have a wealth of experience in assisting organizations through terminations and strongly encourage any organization looking to terminate an employee to contact a member of the HRPAR team as soon as possible for some clear and objective advice.