What is a severance package? A severance package is an offer of monies from an employer to an employee upon termination of employment in exchange for the employee signing a release releasing the employer from liability. In other words, a severance package is a settlement proposal to avoid the employee suing for wrongful dismissal. A wrongful dismissal is a termination without enough severance.
An employee in Ontario is generally entitled to a severance and therefore an employer is eager to offer some amount to settle the issue. Employers either want to pay what is reasonably owed to the employee in good faith or offer some amount to avoid a fight about what is reasonable (i.e. a wrongful dismissal lawsuit) but still save money.
Not all severance packages in Ontario are reasonable. Some severance packages don’t offer enough notice or lack some key component, for example, payment of a bonus.
What is a severance package in Ontario?
A severance package in Ontario is usually an offer consisting of combination of monies encompassing the following requirements:
- A. Payment of an amount of money in lieu of common law reasonable notice (if applicable), which is different than statutory notice / severance;
- B. Payment of an amount of money in lieu of statutory notice per the Ontario Employment Standards Act;
- C. Payment of statutory severance (if applicable) per the Ontario Employment Standards Act;
- D. Payment of vacation pay owing to the date of termination;
- E. Payment of wages owing to the date of termination;
- F. Promise of continuation of benefits for the notice period;
In some cases, employers offer an employee a termination offer in Ontario consisting of the above-noted entitlements plus certain other fringe monies which are generally not required by statute, including: career transition services, continued use of company property such as vehicles, banked sick or vacation pay and an offer to pay for a legal consultation to calculate and review the severance package.
Some employers offer to write the employee a positive reference letter to be included in the severance package, but this is not required.
There are countless other things that may or may not be required in a termination offer depending on the specific circumstances and contract (written, implied or oral) such as:
- A. Payment of an annual bonus;
- B. Payment of commissions that would normally be earned over the notice period;
- C. Payment of vacation pay and overtime that would normally be earned over the notice period;
- D. Relocation fees;
- E. Unpaid expenses;
- F. Pension or RRSP contributions over the notice period;
- G. Continuation of fringe benefits such as discounts etc.;
- H. Anything really the employee reasonably deserves under his or her written, implied or oral contract.
In summary, there are many variables for a severance package in Ontario depending on the unique circumstances of each employee. Not only are there issues regarding what should be included in a specific severance package in Ontario, but there is also the issue of calculating how much severance is appropriate in each case. Thus, consider calling an employment lawyer to review your severance package to calculate if it is reasonable or click here to learn how to calculate severance. It is a wrongful dismissal if your severance package isn’t reasonable.
How long to accept severance offer?
Many employers give an employee a short amount of time to accept a severance package such as one week. However, in Ontario, the statute of limitations for wrongful dismissal is two years. Therefore, employees can actually wait up to two years before accepting any deal proposed by the employer. In most cases the employer will not lower its first offer unless it discovers the employee found new work or failed to bother to look for new work.
In light of the above, if the termination offer is very good and the employee will likely find work soon, the offer should be accepted quickly because an employer can take back an offer and propose a lesser severance amount if the offer was made with an expiration date or if it is taken back by them before the employee accepts the offer.
Still though, an employee should consider reviewing their offer with an employment lawyer in a free consultation to confirm if the offer is actually very good. There’s no harm in checking.
Nevertheless, severance negotiations can go stale and get worse if an employee waits too long.
Beware that severance entitlements are lowered when an employee finds new, comparable work. Accordingly, if an employee is offered even a so-so severance package but has a job already lined up, they should strongly consider accepting the deal. Once an employee mitigates their damages by replacing their lost income with new, comparable income, his damages for wrongful dismissal are severely impacted.
At the same time, severance entitlements can go do down if an employee utterly fails to even try and mitigate his damages. For example, if an employee is obviously entitled to twenty months notice based on common law precedents, but failed to look for any jobs since the termination, by the time he gets to court, the judge may subtract many months from the reasonable notice award on account of the employee’s failure to attempt to mitigate his damages. An employee in Ontario absolutely has a duty to try and mitigate his damages. In fact, generally the only two issues in an employment law wrongful dismissal lawsuit are (1) the appropriate notice period and (2) whether the employee failed to try and mitigate his damages.
Even still, an employee is free to reject a first severance offer or ignore it and hire a lawyer to negotiate or sue for more severance if the first offer was weak. To that effect, the deadline to accept a bad severance offer is meaningless. But, if an employee wants the maximum amount of severance, they had better stay unemployed or else.
To be clear, rejecting a severance offer has no effect on the amount of severance someone is actually is entitled to. It is up to a court, not an employer, to determine what is a reasonable severance. Indeed, employers are forbidden from even bringing up their settlement offers in court. The only issues in wrongful dismissal are generally, again, (1) the appropriate notice period and (2) whether the employee failed to try and mitigate his damages.
In summary, if the severance offer is good, consider accepting it by the deadline proposed by the employer. If the offer is poor, don’t worry about the deadline. Worry about finding a new job and the two year statute of limitation instead.
Can you take back a signed severance package?
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.