Here are some of the most common questions on severance pay HR leaders should be prepared to answer
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?
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.
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.
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.
According to Alberta’s Employment Standards Code (ESC), the minimum amount of severance pay is based on the employee’s length of service.
The minimum amount of written notice and/or pay is based on how long an employee has been employed.
The minimum amount of written notice and/or severance pay is based on the employee’s length of service.
The minimum amount of written notice and/or severance pay is based on the employee’s length of service.
The minimum amount of written notice and/or severance pay is based on the employee’s length of service.
Under Manitoba’s ESC, the minimum amount of severance pay is based on the employee’s length of service.
The minimum amount of written notice and/or severance pay is based on the employee’s length of service.
Employees who are laid off after at least one year of employment are entitled to these options:
The minimum amount of severance pay is based on the employee’s length of service.
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.
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:
There are also exemptions from severance entitlements such as:
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.
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
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.
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.
