How does severance pay work?

Severance pay works by the employer providing you pay in lieu of it having to give you advanced “notice” that your employment will be terminated. For example, let’s say your employer has to give you six months’ notice. Severance pay is just a cheque for six months pay instead of you being told you will lose your job in six months.

Statutory Severance vs Common Law Severance

There are two kinds of severance: 1. statutory severance and 2. common law severance.

Statutory severance pay is a simple formula: If you qualify, you get 1 week of severance pay for every year of service. To qualify, you have to work somewhere for five years and the employer must have a $2.5 million dollar payroll. Statutory severance pay must be paid if it applies – it cannot be provided as “working severance”.

Common law severance pay has no formula. Common law severance is usually calculated in terms of months, not weeks. Generally, you get around 3 to 24 months common law severance depending on certain factors, such as your age, salary, position, years of service and difficulty finding a comparable job. The key question is this: how long will it take you to find a similar job with similar pay. The answer is the number of months of severance you get.

Note that statutory severance laws are laws written down by the government as minimums. Common law severance law is judge-made law from case law going back hundreds of years. Thus, the government may say you only get two weeks’ severance, but a judge might say you get eight months’ severance. That is the difference between statutory and common law severance.

Read here for more about how judges calculate common law severance.

Employees are not entitled to both statutory severance and common law severance. Thus, if you are entitled to seven weeks statutory severance and seven months common law severance, you don’t get both. You only get the greater right to common law severance. But that’s OK, common law severance is worth much more than statutory severance anyway.

What about Statutory Notice Pay?

The Ontario Employment Standards Act, which provides for MINIMUM employment statutory rights for people in Ontario, not the common law, actually has two kinds of pay in case someone is dismissed from their job.

1. Statutory Severance
2. Statutory Notice

Thus, under the Employment Standards Act, Notice and Severance are two distinct concepts (we discussed statutory severance above).

Everyone who worked 90 days or more gets “statutory notice”. Everyone who is entitled to statutory notice gets one week of notice for every year of service. Notice can be given in the form of working notice or pay in lieu of notice.

However, under the common law, notice and severance are not distinct. They are the same thing and an employee is only entitled to one “severance” not “common law severance” and “common law notice”. Read below for more.

In summary, people are entitled to statutory notice and statutory severance. However, common law severance contains money in lieu of statutory notice and statutory severance plus a whole lot more. It is always better to get common law severance than statutory notice and statutory severance.

People Mix up Notice Pay and Severance Pay

Many people mix up “common law notice” AND “common law severance”. However, they are the same thing. In fact, severance pay is the same thing for any kind of “package” you get from your employer when you are dismissed from work. Severance is “notice” because it is an amount of money paid to you in lieu of the employer providing “notice”.

The key is that severance is the amount of money you get from your employer when you are terminated from your job. Some people call severance: termination pay or pay in lieu of notice, but it’s all the same. All that matters is the total amount of months “pay” you get when you are let go from work. Thus, severance is defined by me as: “the number of months pay you get for signing your exit package”. To that end, severance pay works by giving you money to live normally while you look for a new job.

Statutory Severance is just a Minimum

Keep in mind what we said above that most employees have rights under common law that give them much more severance than statutory severance rights. However, it is very important to stress that only courts can enforce common law rights to severance. The Ministry of Labour cannot get you common law severance. The Ministry of Labour can only get you your statutory severance. Thus, most employees should choose to negotiate or sue an employer in a court for “wrongful dismissal (which means ‘not enough severance’)” rather than collect statutory severance. If you complain to the Ministry of Labour and don’t change your mind very quickly, you will be barred from claiming common law severance ever again.

How to get Common Law Severance?

To get common law severance, you need to negotiate yourself or hire a lawyer to sue in court. Only judges can award common law severance. The government cannot get you common law severance.

Do I get Common Law Severance?

Everyone gets common law severance unless they have a termination clause in their contract ousting the common law in favour of some other kind of formula or even just statutory severance. For example, your employment contract could say: “all you get is 1 week of severance per year of service” and that might appear to be good enough to remove your entitlement to common law severance. However, the bread and butter of employment lawyers are getting their clients out of these termination clauses because they are often written poorly.

Read here for more on who is entitled to severance pay.

How does Severance Pay affect Unemployment Benefits in Canada?

Employment insurance (EI) benefits are affected by severance pay. You cannot get EI during the months that your severance pay is equivalent to. For example, let’s say you get seven months severance. You are not allowed to receive EI unemployment benefits in Canada during these seven months. This is because the seven-month severance package is the same as “working” during these seven months under the Employment Insurance Act.

If you go on EI unemployment benefits during your severance period, you will have to pay back EI.

If you go on EI, and then negotiate or win severance weeks or months after that, you will have to pay EI back for the monies you received in EI that your severance package was worth. For example, if you get terminated in January, go on EI in February, and negotiate a ten-month severance in April, then you will have to pay EI back for February to April, and you will not get EI again until October when the 10-month severance package expires. However, you will restart the clock for EI eligibility and number of weeks pay you are entitled to receive from EI, meaning you can get your full entitlement to maximum EI from October onward (i.e. ten months after you lost your job, which the amount in months’ pay you got in your severance package). Unfortunately, most people never get a chance to go back on EI because they find a new job before they ever become eligible again, making EI useless for most people.

Keep in mind that it doesn’t matter if you received a salary continuation or a lump sum cheque in terms of the effect your severance will have on EI. The CRA will review your severance package in something called a Notice of Debt, and if the CRA determines your severance is worth an equivalent to 10 months pay even though you only got one big cheque, then Service Canada will force you to pay back all the money it paid you in EI from the date you were eligible to the date you got your severance package.