Termination pay and severance pay

What is the difference between termination pay and severance pay, and are they both required when dismissing an employee?

Termination pay and severance pay
Colin Gibson

Question: What is the difference between termination pay and severance pay, and are they both required when dismissing an employee?

Answer: Employers may be required to pay “termination pay” and/or “severance pay” to non-union employees who are dismissed without cause. This obligation may arise from the language of an employee’s written employment contract. But, in most cases, a requirement to provide termination pay or severance pay will come from the applicable employment standards legislation.

When an employer dismisses an employee without cause, it has two obligations to the employee. First, the employer must provide the amount of working notice of dismissal or severance/termination compensation that is required by the relevant employment standards statute. Second, the employer must provide the amount of notice or compensation that is required by the employee’s employment contract. If there is no employment contract with an enforceable termination provision, then the common law makes it an implied term of the employment relationship that the employer must provide the employee with reasonable working notice of dismissal.

The minimum requirements an employer must comply with when it terminates an employment relationship without cause are found in employment standards legislation. Normally, the statutory provisions give the employer the option of providing working notice of dismissal or some form of compensation in lieu of such notice, or a combination that adds up to the statutory entitlement.

The nature and amount of compensation an employer is required to provide on termination and the way that compensation is described in the legislation varies between jurisdictions.

In British Columbia, for example, the Employment Standards Act contains an individual termination provision that requires an employer that dismisses an employee without cause to provide a lump-sum payment equal to a certain number of weeks of wages as “compensation for length of service.” The amount of compensation owed depends on the employee’s length of continuous service. Such compensation involves pay only and does not require the employer to continue benefits, and an employer can discharge its obligation to provide compensation by giving working notice of dismissal instead. Under the group termination provisions in the B.C. act, an employer that terminates the employment of 50 or more employees at a single location within a two-month period must provide additional working notice — or “termination pay” — to the affected employees. The number of weeks of group termination notice or termination pay depends on the number of employees who are terminated, not on any individual employee’s length of service. Again, there is no obligation to continue benefits in a group termination situation in B.C.

In Ontario, the Employment Standards Act, 2000 requires an employer to provide “termination pay” to an employee who is dismissed without cause and is not given working notice. Individual termination pay is a prescribed number of weeks based on the employee’s length of service, and it includes an obligation to continue benefits for the same period. Additional termination pay (or working notice of dismissal) is required in a “mass termination” situation, where the employer terminates 50 or more employees in a four-week period.

An Ontario employer may have an additional requirement to provide “severance pay” to an employee who is terminated. Employees in Ontario who have completed five years of service will qualify for this extra severance pay if either the employer has severed the employment of at least 50 employees within six months because of a partial or total closure of the business, or the employer’s annual payroll in Ontario is at least $2.5 million. Employees will be entitled to severance pay for each year of service, up to a maximum of 26 weeks. An Ontario employer cannot reduce or eliminate its obligation to provide severance pay by giving working notice of termination instead.

An employer that wishes to terminate a non-union employee without cause should always consult the employment standards legislation in its jurisdiction carefully, to determine the specific minimum statutory requirements that will apply to the dismissal.

 

Colin Gibson is a partner with Harris and Company in Vancouver. He can be reached at (604) 891-2212 or cgibson@harrisco.com.

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