If you’re letting an employee go, you should be aware that employees may be entitled to specific compensation. While many misconceptions exist regarding employment entitlements and payroll management in Ontario, we at Knit are here to help dispel any confusion and help you understand the most important things you need to know about severance pay in Ontario.
Here is the nitty-gritty of severance pay and how you can calculate it according to the Ontario Employment Standards Act (ESA).
What is severance pay?
According to the ESA “severance pay” refers to compensation paid to qualified employees who have had their employment “severed.” It’s important to note that severance pay is different from termination pay, as the two are often confused.
Termination pay is provided to an employee in place of the required notice of termination of their employment. Employees are entitled to a set amount of termination pay when dismissed without cause.
Severance pay, on the other hand, compensates an employee for losses sustained (i.e. loss of seniority) upon termination Unlike termination pay, severance pay does not apply to every employee by default, and employees have to meet additional qualification criteria before they are eligible.
As an employer, you would have to pay severance if the employee qualifies for severance (explained below), and has been:
- Terminated, due to reasons other than firing-for-cause
- Laid off
- Resigning (this also included instances of constructive dismissal)
Severance pay is a way for companies to compensate their employees for years of service and can also be referred to as the following: severance agreement, severance package and also retirement allowance.
How Does Severance Pay Work?
Now that we understand the basics of severance pay, there are a few reasons employers may provide severance allowance. For an employee to qualify for this entitlement, their employment must be severed and must meet the following criteria: :
- Your employee has worked at your company for five, or more, years (this includes if they were active, inactive, continuous or not);
and your company:
- Currently exceeds $2.5 million in payroll;
- The company has severed or will be severing employment of 50+ workers within six months due to all or part of your business being permanently closed.
Calculating Severance Pay in Ontario
Calculating the amount of severance pay an employee is entitled to is easy! Multiply the employee’s regular wages for a standard work week by the sum of:
- the number of years of employes completed;
- the number of completed months of employment divided by 12 for an incomplete year.
Example: A regular work week
Here is a simple way to put the above formula into action.
Jamila is employed at Cutco Inc. and regularly puts in 40 hours per week. She is paid $18.50 an hour.
Cutco Inc. currently has a payroll that exceeds $2.5 million. Unfortunately they have decided to sever her employment, giving Jamila eight weeks’ notice of termination. Jamila will be working through to the end of the notice period.
At the end of the notice period, Jamila will have worked at the company for exactly six years, eight months and three weeks.
Here’s how Jamila’s entitlement is calculated according to the Ontario ESA:
- Take Jamila’s regular, weekly wages. Since she works full time, she puts in 40 hours a week. Use this formula: 40 hours/week × $18.50 = $740.00
- Take the number of full months in the incomplete year that Jamila has worked at the company and divide by 12. Jamila worked eight complete months in the current year: 8 ÷ 12 = 0.66.
- Take Jamila’s completed years = 6. Add it to the amount from above: 0.66.
6 + 0.66 = 6.66
- Multiply Jamila’s regular weekly wages ($740.00) by the number above: (6.66).
$740.00 × 6.66 = $4,928.40.
- The amount that Jamila is entitled to in severance pay is $4,928.40.
It’s important to note that under the Employment Standards Act (ESA), the maximum amount of severance an employer is required to provide is up to 26 weeks of their regular pay.
There are other considerations for calculating severance pay under the ESA, including calculating for employees paid on a basis other than time worked. Learn more here on the Government of Ontario website.
When Do you Pay Severance Pay to an Employee?
Employers must pay out severance allotments seven days following the severing of an employee’s employment or on what would have been their next regular payday, whichever is later.
An employer may pay severance in installments if they have the electronic or written agreement of the severed employee or the approval of the Director of Employment Standards, Ministry of Labour, Training and Skills Development.
This installment plan cannot exist for more than three years. The entirety of the employee’s severance is due immediately if an employer fails to make a scheduled payment.
A note about COVID-19
As a result of the ongoing COVID-19 pandemic, the government of Ontario has issued new regulations under the ESA that impact severance pay. The new clause states that “a non-unionized employee whose employer has temporarily reduced or eliminated their hours of work because of COVID-19 is deemed to be on a job-protected Infectious Disease Emergency Leave.”
The Ontario government has stated these temporary rules can be retroactively applied back to March 1, 2020 and expire six weeks following the ending of the declared state of emergency.
These rules do not apply to employees represented by a trade union.
In short, the new regulations mean that if an employer temporarily reduces or eliminates an employee’s hours of work for COVID-related reasons, the employee is not considered to be laid off. Similarly, the guidelines mean that an employee is also not considered to be constructively dismissed if their hours of work have been reduced for COVID-related reasons.
There you have it! You’ve just learned how to calculate severance pay in Ontario. While navigating the intricacies of employment entitlements can be tricky, Knit is here to help!
Check out our blog for more information on payroll and team management.