Does severance pay affect Employment Insurance benefits?

There are currently about 1.1 million active EI beneficiaries across Canada

Does severance pay affect Employment Insurance benefits?

Many employers have offered severance pay to aid employees who were laid off during the COVID-19 pandemic – but can it affect the benefits an employee can claim when they are terminated without cause?

Below we determine whether laid-off employees can receive severance pay alongside other benefits.

What is severance pay?

Severance pay is monetary compensation employees receive when they are being laid off or let go through no fault of their own by their employers. The compensation aims to keep the employee financially stable during their unemployment period. A termination without cause includes cost-cutting, downsizing, bankruptcy, and restructuring. It is legal for a company to terminate an employment without cause as long as the reason is not discriminatory against the employee.

When a termination without cause happens, employers should provide a reasonable notice of termination which could be in the form of a severance pay, working notice, or both. A working notice is the period the employee continues to work until their termination date.

Read more: Everything HR needs to know about determining severance packages

What is Employment Insurance?

When an employee loses their job beyond their control, they may apply to be supported by the Employment Insurance (EI). According to the Government of Canada, EI offers temporary financial support to individuals who were laid off without cause while they search for new employment or upgrade their skills.

Employment Insurance benefits is managed by the Canada Employment Insurance Commission (CEIC) while Service Canada is in charge of providing timely and accurate EI payments and services while supporting EI clients with the service. EI benefits for people who were laid off are usually called regular benefits. There are also special EI benefits for others who need support such as maternity benefits, parental benefits, sickness benefits, and compassionate care benefits.

As of January 30,2022, there are about 1,189,570 active beneficiaries across Canada with 895,620 receiving regular benefits.

Unemployed individuals should apply for EI benefits no later than four weeks after their last day of work, or their application will not be accepted.

Does severance pay affect EI?

Companies offering severance packages may affect the EI contributions of unemployed individuals.

Since the start of the COVID-19 pandemic, the rules involving EI have been temporarily changed by the federal government to accommodate the increased number of lay-offs and unemployment. Generally, a person cannot receive EI benefits at the same time they are receiving termination pay from their employer. However, they can receive EI benefits once their severance period – the number of months their severance pay is worth – is over.

Meanwhile, a person receiving EI support but later receives severance pay will need to pay Service Canada back all the EI payments they received before they received their severance package. The EI money paid to the employee before they received their severance pay is called an overpayment. However, the unemployed can regain the EI payments they made afterward.

Severance pay affects EI since the termination pay is considered as earnings covering a number of months despite the employee not needing to report to work. Therefore, EI benefits will start to come in once the months covered by the severance pay are over as support while the individual looks for employment.

However, the government announced a change to the Employment Insurance Regulation wherein individuals who were terminated on or after September 27, 2020 and received a lump sum due to a lay-off could still receive EI benefits. This, however, does not apply to people who are receiving severance pay as a salary continuance. This change to employment law is applicable until September 24, 2022.

Who is eligible for EI?

A person can apply for EI if they can prove that they were previously employed for the required insurable hours in the last 52 weeks or since the start of their previous EI claim. The hours are reported by the employer through a Record of Employment (ROE).

Until September 24, 2022, due to the temporary change made under the Employment Insurance Regulation, an applicant only needs at least 420 hours of insurable employment during their qualifying period to be able to claim EI benefits. After September 24, the program will require applicants to accumulate between 420 and 700 hours of insurable employment based on the unemployment rate in their area during their application.

EI applicants should also be able to claim they are ready, willing, and able to find work. There is a limitation on who can claim EI benefits. For example, employees who voluntarily quit or are fired with a valid reason cannot apply for the benefits. People who were unemployed due to participating in a labour dispute like a strike or lockout are not entitled to EI benefits as well.

In addition, employees who lost their job due to non-compliance with their employer’s mandatory COVID-19 vaccination policy are not eligible for EI regular benefits.

How much EI benefits can one receive?

There is no exact fix amount on how much a person can receive as their EI benefit. For many, the EI benefit is 55% of their average insurable weekly earnings. Since January 1, 2022, the maximum yearly insurable earnings amount is $60,300.

Employment Insurance are taxable by the government and will depend on the current federal and provincial or territorial taxes.

The duration for receiving EI benefits is usually from 14 to 45 weeks, depending on the unemployment rate in their region at the time of applying for their claim and the amount of insurable hours they have accumulated in the last 52 weeks or since their last claim.

Read more: Workers who resist vaccine mandates may not be eligible for EI, according to feds

How HR leaders could support laid-off employees

Even if some employees are being let go or have already been laid off by their companies, there are still ways the former employer could support them as they transition into temporary unemployment. For example, employers could offer assistance in being prepared for any records and documentation the employee might need in applying for EI benefits such as the ROE. It could also include any support during their job hunting process such as providing character references for their former employees when needed.

If the company creates new openings, contacting former skilled employees who were laid off could also be helpful for both the former employee and the company. Prioritizing and reaching out to the former employee could possibly give them an opportunity to come back to a familiar and comfortable workplace and have a stable job if they are still unemployed at the time of contact. It also benefits companies as it lessens time for training and adjustment into a new workplace compared to new hires who would need more guidance.

Although these are simple ways to support former employees, it can be of great significance for them especially during a difficult time. Companies should help in any way possible to make this transition easier for the laid-off employee as it is the duty of a great company to care for their employees even as they exit the workforce.

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