Overtime, severance and common law must be considered
All terminations are accompanied by a risk of litigation. Dismissed employees frequently feel betrayed and look for opportunities to get back at their former employers and they often turn to the courts. There are several key rules employers should follow when calculating a dismissed employee’s final paycheque in order to limit the risk of litigation.
Termination and severance pay
When an employee is terminated without cause, she is entitled to statutory termination pay and is eligible for statutory severance pay. Termination pay is based on the regular wages a dismissed employee would have earned during the applicable statutory notice period. Severance pay is an additional payment meant to compensate for loss of seniority, job-related benefits and length of service.
All employees dismissed without cause are entitled to receive termination pay. Severance pay is only payable to employees that meet certain statutory requirements. In Ontario, an employee is entitled to severance pay if the employer has a payroll of $2.5 million or more and the employee has worked for either at least five years or has worked for at least three months and is part of a mass termination.
Under the Ontario Employment Standards Act (ESA), termination and severance pay are calculated based on remuneration and tenure. An employee’s remuneration must incorporate more than base salary.
Pursuant to the definitions of wages and regular wages under the Ontario ESA, the calculation must include commissions, non-discretionary bonuses, bonuses related to hours worked, production or efficiency, overtime pay, public holiday pay and allowances for room and board.
Termination and severance pay must be paid within specific timeframes. Termination pay must be paid in a lump-sum payment within the later of seven days from the date of termination or what would have been the employee’s next scheduled pay day.
Similarly, severance pay must be paid within that same timeframe, except where an employee elects to receive it in installments.
Overtime and holiday pay
The calculation of the final paycheque takes into account all the hours worked by an employee. Accordingly, overtime and holiday pay should be included in this computation.
Most Ontario employees are entitled to overtime pay for hours worked in excess of 44 hours in a regular work week (1.5 times their regular wages).
Employees are also entitled to holiday pay equivalent to one day’s pay provided they have worked their regular shifts before and after a public holiday.
If employees work on a public holiday, they can elect to either receive both 1.5 times their regular hourly rate and holiday pay, or receive the regular rate of pay for the holiday worked and obtain an additional day off with public holiday pay.
Vacation pay and vacation time
In Ontario, after one year of employment, employees are entitled to at least two weeks’ vacation time for every 12 months worked. Unlike vacation time, vacation pay starts to accrue as soon as the employee earns wages. If not paid on every paycheque, these funds are held in trust by the employer, and upon termination, the employee is entitled to receive the accrued funds. Vacation pay continues to accrue during the statutory period of termination pay (up to eight weeks).
Accrued and unpaid vacation pay must be provided to the employee within seven days from the date of termination or what would have been the employee’s next scheduled pay day, whichever is later.
Employee benefits
Employment standards legislation generally provides that benefit plans should be maintained during the statutory notice period (up to eight weeks in Ontario). This includes life insurance benefits, comprehensive health benefits and disability indemnification benefits.
Retiring allowances
An amount paid to an employee arising from the cessation of employment can be deemed as employment income or as a retiring allowance under the Income Tax Act. An amount cannot be deemed a retiring allowance if the employment relationship continues to exist.
Termination pay cannot be characterized as a retiring allowance because it is viewed as employment income.
Additional severance amounts which compensate for loss of employment may, however, properly be considered retiring allowances.
The following are some examples of payments that should not be characterized as retiring allowances: pension benefits; benefits from counseling; salary or wages; accrued vacation pay; amounts received from an employee benefit plan or salary deferral arrangement; and reimbursement of legal costs.
Common law Severance
Above statutory termination and severance pay, a dismissed employee may be entitled to common law severance. This entitlement exists unless there is an enforceable contractual provision which establishes that there is no entitlement to common law severance and provided that the employee has not earned other income.
The amount of common law severance, which in most cases is far greater than statutory termination and severance pay, is determined based on a dismissed employee’s age, tenure, position, experience and qualifications and the availability of comparable work.
Payroll practitioners must be alert to the fact that many legal risks are associated with terminations. Knowledge and understanding of the applicable laws are essential in preventing many of these disputes. By respecting the minimal statutory rights extended to dismissed employees, payroll practitioners can confidently rely on their practices to help minimize the risk of litigation.
Cédric Lamarche is an employment lawyer with Whitten & Lublin in?Toronto, a boutique employment law firm assisting employers and employees on various workplace legal matters. He can be reached at [email protected] or (416) 640-2667.
