Does severance count as insurable employment hours (EI)?

To qualify for employment insurance (“EI”) you need “X” number of “Hours” of work during a 52 week “Qualifying Period”. 

Some employees who are just short of the number of Hours required to be eligible for EI ask me if the severance pay, or the pay in lieu of notice upon termination they receive counts as “Hours”. They want to know if the amount of severance or the pay in lieu of notice upon termination they receive equal an equivalent in EI eligibility Hours such that the amount of termination pay they receive provides them just enough Hours to qualify for EI.

To better understand this concept, let’s use an example of an employee in Toronto named Joe who was terminated after just 10 weeks of employment by Widget Corp. Joe did not work at any other job this year before he started his job at Widget Corp. Joe worked a 40-hour workweek at Widget Corp before he was terminated. That means he worked 400 hours in the EI “Qualifying Period” before he lost his job. 

Based on the government of Canada chart for Number of Insured Hours Required to Qualify for Regular Benefits in Toronto, Joe would not qualify for EI with only 400 hours because he needed 700 hours in the qualifying period.

However, what if Joe negotiated himself a 10-week severance package? Would those 10 weeks get him over the edge to 700 qualifying Hours for EI? The theory is simple. 10 weeks of pay in lieu of notice equal the equivalent of working 400 hours. Therefore, in theory, Joe would have worked the equivalent 800 hours in the 52 week qualifying period had working notice been given. But, does Service Canada recognize the 400 hours equivalent earned in this notice period? The answer is no, unfortunately. Reasonable notice is a “retirement allowance” to which no Hours are earned. However, if the severance pay was not for reasonable notice, but rather for the statutory severance period or a contractual notice period according to a termination clause or from a constructive dismissal, then those monies could perhaps be considered “Hours” because they are not retiring allowances.

What severance monies equal EI qualifying Hours?

Part I of the Employment Insurance Regulations (SOR/96-332) define what are “Hours of Insurable Employment”. Section 10.1(3)(b) says that “Hours” can be Hours even if the employee did not work:

“Where an insured person is remunerated by the employer for a non-working day and does not work on that day, the person is deemed to have worked in insurable employment for the number of hours that the person would normally have worked on that day.”

There is no exclusion for termination pay or payment in lieu of notice in this section. Rather, there is an exclusion for “Retiring Allowance” per section 10.1. Thus the question becomes, what is a “Retiring Allowance”.

A retiring allowance is defined in subsection 248(1) of the Income Tax Act as an amount received by an individual:

1. on or after retirement of the individual from employment in recognition of the individual’s long service; or
2. in respect of loss of employment of the individual, whether or not received as, on account of or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal.

This definition of “retirement allowance” has been interpreted by the courts to mean that a lump sum payment for reasonable notice is generally a retirement allowance, but it is NOT a retirement allowance:

• if the notice period is contractual in nature (see Income Tax Folio S2-F1-C2, Retiring Allowances and case law on this issue), or
• payments made in salary continuance (see Income Tax Folio S2-F1-C2, Retiring Allowances and case law on this issue), or
• a constructive dismissal (Ahmad v. The Queen, 2002 DTC 2065).

Thus, so long as the termination pay provided to an employee upon termination pay is not a “retirement allowance”, then that termination pay may be considered “Hours” in terms of calculating the EI qualifying Hours of an insured person.