7 frequently asked questions about severance pay

Here are some of the most common questions on severance pay HR leaders should be prepared to answer

7 frequently asked questions about severance pay

As the COVID-19 pandemic forced businesses across Canada to make painful cuts in their workforce, the issue of severance pay has been on the minds of many employees.

Unfortunately, severance pay is not always understood, and impacted employees often have a myriad of questions and concerns.

Below, we look through some of the more frequently asked questions about severance pay that every leader should be prepared to answer.

Read more: Do contracts need to specify severance conditions?

1. What is severance pay?

Severance pay is monetary compensation that employers offer to employees who are being laid off or let go through no fault of their own. The reasons could be due to factors beyond the employee’s control such as bankruptcy, restructuring, cost cutting, or downsizing. Severance pay is meant to aid employees during the transition period in between jobs.

In these situations, employers should give a reasonable notice of termination to affected employees. This can be through a working notice, severance pay in lieu of working notice, or both. A working notice is the amount of time the employee continues working until their termination date.

2. How is severance pay calculated?

Severance pay is calculated based on many aspects such as terms agreed in employment contract, length of employment, age, position, availability of employment, salary, and benefits. Additionally, provinces and territories have their own regulations regarding severance pay.

Ontario

The amount is nominally set by the Employment Standards Act (ESA), which calculates severance pay by multiplying 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 by employers to pay user the ESA is 26 weeks.

Alberta

According to Alberta’s Employment Standards Code (ESC), the minimum amount of severance pay is based on the employee’s length of service.

  • Between 90 days and two years of service: one week’s notice and/or pay
  • Two to four years of service: two weeks’ notice and/or pay
  • Four to six years of service: four weeks’ notice and/or pay
  • Six to eight years of service: five weeks’ notice and/or pay
  • Eight to 10 years of service: six weeks’ notice and/or pay
  • 10 years or more: eight weeks’ notice and/or pay

British Columbia

The minimum amount of written notice and/or pay is based on how long an employee has been employed.

  • Three months or less: No notice and/or pay
  • More than three months: One week of notice and/or pay
  • More than one year: Two weeks of notice and/or pay
  • More than three years: Three weeks of notice and/or pay, plus one week of notice/pay after each additional year of employment (to a maximum of eight weeks)

Quebec

The minimum amount of written notice and/or severance pay is based on the employee’s length of service.

  • More than three months but less than a year: one week’s notice and/or pay
  • One to five years: two weeks’ notice and/or pay
  • Five to 10 years: four weeks’ notice and/or pay
  • 10 years or more: eight weeks’ notice and/or pay

Nova Scotia

The minimum amount of written notice and/or severance pay is based on the employee’s length of service.

  • More than three months but less than two years: one week’s notice and/or pay
  • Two to five years: two weeks’ notice and/or pay
  • Five to ten years: four weeks’ notice and/or pay
  • 10 years or more: eight weeks’ notice and/or pay

New Brunswick

The minimum amount of written notice and/or severance pay is based on the employee’s length of service.

  • Less than six months: no notice or pay required
  • More than six months but less than five years: two weeks’ notice and/or pay
  • Five years or more: four weeks’ notice and/or pay

Manitoba

Under Manitoba’s ESC, the minimum amount of severance pay is based on the employee’s length of service.

  • Less than one year: one week’s notice and/or pay
  • One to three years: two weeks’ notice and/or pay
  • Three to five years: four weeks’ notice and/or pay
  • Five to 10 years: six weeks’ notice and/or pay
  • 10 years or more: eight weeks’ notice and/or pay

Saskatchewan

The minimum amount of written notice and/or severance pay is based on the employee’s length of service.

  • At least three months: one week’s notice and/or pay
  • At least one year: two weeks’ notice and/or pay
  • At least three years: three full weeks’ pay
  • After each additional year of employment, employees are entitled to a week’s full pay

Northwest Territories

Employees who are laid off after at least one year of employment are entitled to these options:

  • Separation Assistance: Severance pay of two weeks’ pay per year for the first ten years of employment and three weeks’ pay for each succeeding year of employment. The total amount of severance pay shall not exceed 65 weeks of pay.
  • Severance Priority:
    • One to two years of employment: two weeks’ pay
    • Two years of employment: two weeks’ pay and one week pay for each succeeding complete year of employment. The total amount of severance pay shall not exceed 28 weeks of pay

Yukon

The minimum amount of severance pay is based on the employee’s length of service.

  • One to four years: one day’s pay per year
  • Five to nine years: 2.5 days’ pay per year
  • 10 to 14 years: 3.5 days’ pay per year
  • 15 to 19 years: 5 days’ pay per year
  • 20 years or more: 5.5 days’ pay per year

3. What is the difference between termination pay and severance pay?

Many confuse termination pay and severance pay as interchangeable terms, but they are not the same. Termination pay refers to the minimum pay that is given to an employee when they lose their job, are fired, or are laid off on the spot. The amount of pay is likely stated in their employment contract – otherwise their pay can be based on appropriate provincial or territorial legislation.

Meanwhile, not everyone is entitled to severance pay. Severance pay aims to compensate the employee for more than just the loss of employment and to help them during their unemployment period.

4. Who is eligible to receive severance pay?

Under the ESA, employees are eligible if the employee has at least five years of service with the employer and the employer has a payroll of at least $2.5 million; or the employee is one of 50 or more employees whose employment was terminated within a six-month period.

Severance pay is entitled in several situations such as:

  • Employees being let go due to the company filing for bankruptcy
  • Establishment is closing permanently
  • Employee’s role is being dissolved

There are also exemptions from severance entitlements such as:

  • Refusing an alternative role offered by the employer
  • Permanent closure of all or part of the company’s business due to strikes
  • Employee in construction or maintenance of buildings, structures, roads, sewers, or other works
  • Employees retiring on full pension
  • Employees guilty of misconduct, neglect, or disobedience
  • Employees resigning or quitting without providing notice

Independent contractors, in many cases, are not eligible for severance pay unless they have a contract with the company that states they are. However, companies that hire independent contractors who are treated as employees may offer a severance pay to those contractors.

5. Do employees get severance pay if they resign?

A company does not have to pay employees severance if they voluntarily resign, since it is a decision made voluntarily by the employee and thus is out of the employer’s control. However, an employee can sue for wrongful dismissal or demand termination pay if they were constructively dismissed – which happens when the employer unfairly changes an employee’s job description or salary or is treated so poorly that they cannot reasonably return to work.

Also, an employee is not entitled to severance pay if there is just cause for the termination.

Read more: Court overturns decisions on severance and LTD benefits
 

6.Do employees need to pay income tax for severance pay?

Yes, employees need to pay income tax on severance pay. The amount of tax is based on the amount of the severance pay they will receive and the method they choose to receive it. Employers can offer severance pay through a lump-sum payment which could be in a form of cheque that employees can deposit. Alternatively, companies can offer salary continuance as severance pay, wherein employees receive their regular pay and benefits for a set period. Companies can also offer severance pay in deferred payments over two or more years.

For example, employees end up paying for more taxes if they receive their severance pay through lump-sum payment than a salary continuance. However, employers will not deduct Canada Pension Plan (CCP) contributions, Quebec Pension Plan (QPP) contributions, or Employment Insurance (EI) premiums from lump-sum severance pay, but usual deductions would come out for salary continuance.

7. What is included in a severance package?

While severance pay is usually a lump sum payment to cover the employee’s salary for a certain period of time, a severance package can include other forms of compensation and benefits, such as the continuation of insurance benefits, bonuses, commissions, pension contributions, and even assistance in finding a new job.

Companies usually offer severance packages as a sign of goodwill and gratitude towards the employee and their services to the company. Additionally, some companies decide to offer severance packages so employees do not sue them for wrongful termination, unpaid wages, or discrimination.

It is always unfortunate when a company is forced to let go of good employees, but employers should note that there are many things they can do ease the process.

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