What employees are entitled to during their termination varies widely between the bare minimum, all the way up to fair and reasonable packages under the common law. The range of entitlements depends mostly on if there is an enforceable contract, i.e. an agreement that properly sets out duties and obligations as well as comply with all regular contract law principles (which is not as simple as one may think). A great number of contracts are not enforceable and employees end up with much more entitlements than employers planned.
Termination pay under the Employment Standards Act 2000 (ESA) is the bare minimum you are entitled to upon termination. If employees have an enforceable employment contract and have served for over 3 months, they are entitled to written notice, pay in lieu of notice, or a combination of both upon termination. The period of the notice is determined mainly in proportion with the length of their employment. During their notice period, employees continue to enjoy access to their benefit packages and to earn vacation pay.
Generally, under the ESA, employee accrue 1 week of notice per year of service. The following chart provides the notice required according to years of service.
|Period of Employment||Notice Required|
|Less than 1 year (but at least 3 months)||1 week|
|1 year but less than 3 years||2 weeks|
|3 years but less than 4 years||3 weeks|
|4 years but less than 5 years||4 weeks|
|5 years but less than 6 years||5 weeks|
|6 years but less than 7 years||6 weeks|
|7 years but less than 8 years||7 weeks|
|8 years or more||8 weeks
During the ESA notice period, the employer is expected to pay regular wages, regular rates for a regular work week.
Termination pay is often confused with severance pay. The two terms are frequently and erroneously used interchangeably. To set the record straight, we clarify severance pay below.
Employees may be entitled to severance pay under the ESA. The ESA governs the law regulating severance pay, the situations which could give rise to a severance pay, the way in which the amount is calculated and any exemptions that might apply.
More importantly, the ESA serves as a minimal protection for employees. So, be mindful of the fact that as an employee, you may be entitled to further protection pursuant to other statutory legislation or under the common law.
What is Severance Pay?
Severance pay is compensation for losses that is payable to a qualified employee in situations where their employment has been ‘severed’.
Am I Entitled to Severance Pay?
To determine whether you are entitled to severance pay, the ESA provides some useful guidelines.
- First, you need to determine if the employment has been severed. The ESA deems an employment is ‘severed’ upon the following situations:
- The employer dismisses or stops employing the employee, including where an employee is no longer employed due to the bankruptcy or insolvency of their employer;
- The employer “constructively” dismisses the employee;
- For more information on constructive dismissal please refer to the ESA, but for our purpose, a constructive dismissal refers to the situation in which an employee resigns as a result of the employer creating a hostile or poisoned work environment.
- The employer lays the employee off for 35 or more weeks (the weeks not have to be consecutive) in a period of 52 consecutive weeks;
- The employer lays the employee off because all of the business at an establishment closes permanently; or
- The employer gives the employee written notice of termination which leads the employee to give two weeks’ written notice to resign during the statutory notice period
- You then need to establish the fact that you have been employed by the employer for at least 5 years (including all time spent by the employee in the employment of the employer whether continuous or not and whether active or not).
- Next, the employer has an annual payroll in Ontario of at least $2.5 million OR the employer severed the employment of 50 or more employees (including the employee in question) in a six-month period because all or part of the business at the employer’s establishment has been permanently discontinued
Some exceptions apply: Severance pay does not apply in situations where the employee has refused an offer of “reasonable alternative employment” with the employer – but what was offered to you may not be reasonable. Either way, check with an employment lawyer before you decide your own eligibility.
How is the Amount of Severance Pay Calculated?
The maximum amount of severance pay that an employee can be entitled to pursuant to the ESA cannot exceed 26 weeks. To calculate the specific amount of severance pay, the employee’s regular wages for a regular work week is multiplied by the sum of:
- the number of completed years of employment;
- the number of completed months of employment divided by 12 for a year that is not completed.
Here’s an example to illustrate this:
John gets paid $15 per hour and works 40 hours in a regular work week. He has been working for his employer for 10 years and 6 months and was just recently dismissed by his employer due to their bankruptcy. The employer has an annual payroll of more than $2.5 million. Is John entitled to severance pay, and if so, what is the amount?
It is clear that John qualifies for a severance pay as he’s been working for at more than 5 years, the employment has been severed as deemed by the ESA, and the employer’s annual payroll is at $2.5 million. Also, none of the exemptions apply so we can now consider the amount of severance pay.
To calculate the amount:
- John’s regular wages for a regular work week: $15 x 40 = $600
- Number of completed years of employment: 10
- Number of completed months of employment divided by 12 for a year that is NOT completed: 6/12= 0.5
- Sum of (2) and (3): 10 + 0.5 = 10.5
- Multiplying (1) and (4): $600 x 10.5 = $6,300
John would be entitled to $6,300 in severance pay under the ESA.
Common Law Notice
In the absence of an enforceable employment contract, or when the employment is pursuant to a verbal agreement, the employee is entitled to Common law notice at termination. Nor precise formula exists to calculate a reasonable Common law notice period, instead, a number of elements referred to as Bardal Factors will be considered. Those factors are
- The nature and character of the employment;
- length of service;
- age of the employee, and
- likelihood of securing similar employment considering the employee’s experience, training and qualifications.
This said, depending on the answers to these questions, a Common law notice can fluctuate and as such, it is not an exact science – the expertise of a legal professional can be greatly beneficial if you are looking to calculate Common law notice.
For more on Common Law Notice periods, read this article.
Whether you are an employer or employee, understanding how your termination affects you is important. This can be a complex arena to navigate through but our employment lawyers are professionally equipped with the knowledge and skills to guide you through understanding your rights and qualifications for severance pay. Contact us at (800)771-7882, or email firstname.lastname@example.org and we would be happy to assist.
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