Understanding Severance
Often times employees don’t properly understand what severance is. Severance pay is not termination pay. Termination pay is given to the employee in place of the required notice of termination. So what is severance?
Severance is a statutory term. Severance of employment occurs when the employer dismisses the employee, including an employee can no longer be employed due to the bankruptcy or insolvency of the employer. Severance occurs when an employee is laid off 35 or more weeks out of 52 weeks. Severance also occurs when the business closes permanently.
To qualify for severance pay in Ontario, the employee must have worked for the employer for five or more years (whether continuous or not and whether active or not with the employer) and that employee’s employer has a payroll of at least $2.5 million or the employer has severed the employment of 50 or more employees any six month period because all or part of the business closed. Severance pay is not difficult to calculate.
The basic calculation is made by multiplying the employee’s regular wages for 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 years not completed. The maximum amount of severance pay that you could receive under the employment standards act of Ontario is 26 weeks.
An example calculation is that Sandy works a 40 hour workweek in a state $15 an hour. Her employer has a payroll of $2.5 million. The employer gives Sandy seven weeks notice and Sandy works for the notice. At the end of the notice Sandy’s employment severed. On that date saying he has been employed for seven years nine months and two weeks. To calculate severance pay you would do as follows:
1. Calculate Sandy’s regular wages for a regular work week. She works 40 hours a week times $15 an hour = $600/week.
2. The number of Sandy’s completed years = 7
3. Why the number of completed months Sandi was employed by 12(Sandy worked nine complete months divided by 12 equals .75)
4. You then add the number and step two to the number rise in step three = 7.75
5. Multiply Sandy’s regular wages for regular work week (600) by the number rise in step four = $4650.00.
Sandy’s therefore entitled to $4650 in severance pay and employment standards act. Simply done it’s the regular wages in a work week X (completed years of employment PLUS number of completed months of employment divided by 12 for a year that is not completed).
The employment standards act notes that employee must receive severance pay out within seven days after the employment is severed or on what would have been that employees regular next payday, whichever is later. An employer may also pay severance pay to employee if there is a written agreement or the approval of the Dir. of employment standards at the Ministry of Labor. However the installment plan, if approved by the director of employment standards may not exceed three years. There are several exceptions from severance pay. For example if the employee has refused an offer reasonable alternative employment, has refused reasonable alternative employment that is available to the employee through a seniority system, has had the employment severed because of the strike as long as the employer is able to show that the economic effects of the strike caused the closing of the business are part of the business, has lost his or her employment because the contract of employment is impossible to perform or has been frustrated by unexpected or unforeseen circumstances (not including bankruptcy or insolvency or when the contract has been frustrated or impossible to perform as the result of an injury or illness suffered by an employee). There are other reasons why employment severance is not payable. You must speak to a lawyer to determine whether or not severance is payable to employees.
Also important is that severance pay under the employment standards act and termination pay under the employment standards act are minimum requirements only. This is where you run the risk of employee is suing your company for wrongful dismissal. Another important point to remember is that employee cannot sue an employer for wrongful dismissal and file a claim for termination pay or severance pay with the Ministry of Labor for the same termination or severance of employment by the employer. Employees need to choose one or the other and this is where an employee should speak with counsel before making a decision with respect to any offer of employment. As for employers, there is an advantage to you it is obvious if you choose to overpay the minimum requirements within reason. It comes down to the costs of the employee retaining a lawyer versus the over and above the statutory minimum notice.
There is argument as to whether the statutory minimums should be worked by the government. The Toronto Star had a great article printed last May 8, 2008 concerning a man woodwork 16 years service with a company in London and was terminated without severance. The company that made packages for M&M meats have fewer than 50 employees and a payroll below $2.5 million. It was legal but it did not seem right especially with the economy in a downturn in manufacturing jobs being reduced a rapid state. The NDP leader Howard Hampton at the time noted that this was a loophole in companies were taking advantage of it. They were quietly chopping the jobs below the number of 50 thereby reducing their payroll to under 2.5 million then laying off the remaining staff to avoid paying severance. He indicated at the time that companies with fewer than 25 employees in payrolls below 1 million should be exempt. It is horribly unfortunate that companies are trying to skirt the law. It was also noted in that article that it was difficult to know how often companies take advantage of the severance law because the Ministry does not require the employers to report layoffs fewer than 50.
The process is inequitable and unfair for long-term employees if the company purposely reduces its staff in piecemeal fashion.
If you have any questions concerning severance please do not hesitate to call Matt Lalande to discuss.
This is not legal advice, but a comment on the employment standards act.
Understanding Severance
Often times employees don’t properly understand what severance is. Severance pay is not termination pay. Termination pay is given to the employee in place of the required notice of termination. So what is severance?
Severance is a statutory term. Severance of employment occurs when the employer dismisses the employee, including an employee can no longer be employed due to the bankruptcy or insolvency of the employer. Severance occurs when an employee is laid off 35 or more weeks out of 52 weeks. Severance also occurs when the business closes permanently.
To qualify for severance pay in Ontario, the employee must have worked for the employer for five or more years (whether continuous or not and whether active or not with the employer) and that employee’s employer has a payroll of at least $2.5 million or the employer has severed the employment of 50 or more employees any six month period because all or part of the business closed. Severance pay is not difficult to calculate.
The basic calculation is made by multiplying the employee’s regular wages for 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 years not completed. The maximum amount of severance pay that you could receive under the employment standards act of Ontario is 26 weeks.
An example calculation is that Sandy works a 40 hour workweek in a state $15 an hour. Her employer has a payroll of $2.5 million. The employer gives Sandy seven weeks notice and Sandy works for the notice. At the end of the notice Sandy’s employment severed. On that date saying he has been employed for seven years nine months and two weeks. To calculate severance pay you would do as follows:
1. Calculate Sandy’s regular wages for a regular work week. She works 40 hours a week times $15 an hour = $600/week.
2. The number of Sandy’s completed years = 7
3. Why the number of completed months Sandi was employed by 12(Sandy worked nine complete months divided by 12 equals .75)
4. You then add the number and step two to the number rise in step three = 7.75
5. Multiply Sandy’s regular wages for regular work week (600) by the number rise in step four = $4650.00.
Sandy’s therefore entitled to $4650 in severance pay and employment standards act. Simply done it’s the regular wages in a work week X (completed years of employment PLUS number of completed months of employment divided by 12 for a year that is not completed).
The employment standards act notes that employee must receive severance pay out within seven days after the employment is severed or on what would have been that employees regular next payday, whichever is later. An employer may also pay severance pay to employee if there is a written agreement or the approval of the Dir. of employment standards at the Ministry of Labor. However the installment plan, if approved by the director of employment standards may not exceed three years. There are several exceptions from severance pay. For example if the employee has refused an offer reasonable alternative employment, has refused reasonable alternative employment that is available to the employee through a seniority system, has had the employment severed because of the strike as long as the employer is able to show that the economic effects of the strike caused the closing of the business are part of the business, has lost his or her employment because the contract of employment is impossible to perform or has been frustrated by unexpected or unforeseen circumstances (not including bankruptcy or insolvency or when the contract has been frustrated or impossible to perform as the result of an injury or illness suffered by an employee). There are other reasons why employment severance is not payable. You must speak to a lawyer to determine whether or not severance is payable to employees.
Also important is that severance pay under the employment standards act and termination pay under the employment standards act are minimum requirements only. This is where you run the risk of employee is suing your company for wrongful dismissal. Another important point to remember is that employee cannot sue an employer for wrongful dismissal and file a claim for termination pay or severance pay with the Ministry of Labor for the same termination or severance of employment by the employer. Employees need to choose one or the other and this is where an employee should speak with counsel before making a decision with respect to any offer of employment. As for employers, there is an advantage to you it is obvious if you choose to overpay the minimum requirements within reason. It comes down to the costs of the employee retaining a lawyer versus the over and above the statutory minimum notice.
There is argument as to whether the statutory minimums should be worked by the government. The Toronto Star had a great article printed last May 8, 2008 concerning a man woodwork 16 years service with a company in London and was terminated without severance. The company that made packages for M&M meats have fewer than 50 employees and a payroll below $2.5 million. It was legal but it did not seem right especially with the economy in a downturn in manufacturing jobs being reduced a rapid state. The NDP leader Howard Hampton at the time noted that this was a loophole in companies were taking advantage of it. They were quietly chopping the jobs below the number of 50 thereby reducing their payroll to under 2.5 million then laying off the remaining staff to avoid paying severance. He indicated at the time that companies with fewer than 25 employees in payrolls below 1 million should be exempt. It is horribly unfortunate that companies are trying to skirt the law. It was also noted in that article that it was difficult to know how often companies take advantage of the severance law because the Ministry does not require the employers to report layoffs fewer than 50.
The process is inequitable and unfair for long-term employees if the company purposely reduces its staff in piecemeal fashion.
If you have any questions concerning severance please do not hesitate to call Matt Lalande to discuss.
This is not legal advice, but a comment on the employment standards act.