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Severance For Contract Employees

Severance for contract employees varies greatly depending on a number of circumstances.

If a contract worker is an independent contractor, then they do not get any severance.

If a contract worker is a dependent contractor, they do get severance (common law severance or some other formula if there is a termination clause).

If a contract employee, who is not an independent contractor, is on a fixed-term contract, they get no severance if they are terminated at the expiry of the fixed term. However, if they are terminated before the expiry of the fixed term, they do get severance, and the amount of severance they are entitled will be stated in the employment contract or it will be the balance of the fixed term.

If a contract employee, who is not an independent contractor, has no fixed term in their employment contract, they do get severance (common law severance or some other formula if there is a termination clause).

Nevertheless, it is important to keep in mind that all employment contracts are different, and some may contain various clauses (like a termination clause) that modify severance rights, while others may be entirely unenforceable.

For example, common issues for “contract employees” in employment law litigation include:

  1. Workers being misclassified as independent contractors;
  2. Fixed terms being ousted by long-standing, continuous service at the same employer, thereby defaulting to common law severance even if the employee is terminated upon the expiry of the fixed-term contract; and
  3. Employees seeking the balance of a fixed term as severance pay where the balance of the fixed term is quite lengthy and lopsided.

How to Check What Kind of Contract Employee I Am?

Check your written contract to see, first, whether you are an employee or an independent contractor. Independent contractors are distinguished from employees, and they are not entitled to any severance. However, as discussed above, some “independent contractors” are misclassified as such even though they are truly “employees” who are entitled to severance.

Read more: Independent Contractor vs Employee Ontario

If you are not an independent contractor but are “under contract” it could be that your employment relationship is akin to a pro athlete, and you are “signed” to your employer for a fixed period of time. Thus, unless the contract says otherwise, you cannot be “released” unless you are paid out the balance of the contract just like a hockey player (or a coach). Alternatively, you can be released (i.e. terminated) with no severance if you work until the end of the contract.

Lastly, remember that just because you have an employment contract, does not mean you are a “contract employee”. You may be a regular employee who just has various agreements with your employer about your rights and obligations which are simply contained in an employment contract. This is actually the standard employment relationship in Canada.

How to Calculate Severance for Contract Employees

If you are a genuine independent contractor, you do not get severance. However, check your contract, you may be entitled to some notice or pay in lieu in the event you are terminated, although this is generally discretionary.

Read More: Severance for Employees who used to be Contractors

If you are misclassified independent contractor, then you are entitled to severance just the same as a normal employee.

If you are a dependent contractor, you are entitled to severance just the same as a normal employee. Dependent contractors are distinguished from independent contractors due to their exclusivity and reliance on one employer. In other words, if an “independent contractor” is economically dependent on the employer, due to exclusivity, then the so-called “independent contractor” is likely to be a “dependent contractor” instead who is entitled to common law severance upon dismissal.

If you are a fixed-term employee, then you are entitled to the balance of your contract upon termination. For example, if you signed a fixed-term employment contract for two years, and you were terminated 6 months in, then you would be entitled to 18 months of severance per se. However, savvy employers who hire fixed-term employees may have protected themselves from such lopsided severance payouts by using a termination clause in the original contract allowing it to terminate the employee before the end of fixed-term without paying the balance of the fixed term. Nonetheless, these termination clauses must be carefully worded, free from any ambiguity, otherwise, a court will find that the employee ought to be paid for the balance of the fixed term.

Note: fixed-term employees terminated at the end of the fixed-term contract are not entitled to severance. However, if they worked for a very long period, with many fixed-term contracts renewed by the same employer over time, they could argue that the fixed-term contract was a sham, and they should receive severance like a normal employee.

If you are a contract employee, with no fixed term, then you are really just a normal employee who is entitled to severance.

If there is no valid termination clause in your employment contract, you are entitled to “common law severance”.

However, if there is a valid termination clause in your employment contract, you will be entitled to either “minimum statutory severance” (one week per year of service) or some other pre-determined formula like one month of severance per year of completed service. Thus, check your employment contract for a termination clause.

If you do not have an employment contract or if you have an employment contract which does not contain a valid termination clause, then, as discussed above, “common law severance pay” applies to you.

Not all termination clauses are enforceable. Poorly written ones are often deemed void by the courts. In this case severance rights default to the common law.

Calculating common law severance is an art, not a science. There is no formula. Instead, there are four main factors relevant to the determination of common law severance:

  1. Character of the employment;
  2. Length of service;
  3. Age of the employee; and
  4. Availability of similar employment.

These factors must be applied on a case-by-case basis, and no one factor should be given disproportionate weight.

Whether or not someone was “on contract” generally has no bearing on the calculation of common law severance.

Essentially, we take all the above factors and compare them to past “wrongful dismissal” cases where somebody sued for more severance to learn that, for example, in cases where somebody:

  1. Was an engineer;
  2. Worked for 20 years;
  3. Was 50 years old; and
  4. And has difficulty finding new work

The employee would be entitled to around 18-24 months’ severance. We know this because we can read multiple past cases in Canada where someone in the same circumstances as the above example employee received anywhere from 18-24-months’ severance from the court.