Severance Pay Calculator: Why You Shouldn’t Use One

Small to medium sized Ontario businesses faced with the termination of a relatively long-standing employee sometimes google how much severance they have to pay. This is a trap that leads down the slippery slope of “severance pay calculators”.

Indeed, googling “how much severance” and the like leads to no less than three different severance pay calculators on the first page.

These severance pay calculators are not employer friendly. They were created by employee-side employment law firms as a marketing scheme to draw in potential clients for wrongful dismissal. After testing them out, we discovered the claims made up on these severance pay calculators were not entirely accurate in most instances, sometimes spitting back an inflated number.

Thus, it begs the question – why would any employer use a severance pay calculator to determine how much severance someone is entitled to considering those severance pay calculators usually spit back employee friendly numbers?

Not to mention, severance pay calculators are less than accurate even for employees, let alone for employers. These basic apps simply use 3 or 4 factors (usually age, salary, position and years of service) to “determine” how much severance someone is owed despite the fact that the courts consider hundreds of factors, giving varying emphasis to different factors or considering some factors but not others.

Even the Ontario government has gotten into the business of severance pay calculators. But their severance pay calculator isn’t just bad marketing, its misleading. It spits back a severance timetable based on minimum severance only. It ignores the common law period of severance, which is a much greater benefit that most employees are entitled to unless a termination clause in the employment contract says otherwise. In addition, it doesn’t spit back any severance for folks with less than 5 years’ service (which is technically true but ignores the fact most folks don’t know the difference between severance and notice).

In sum, severance calculators are a lot like the old “one month per year of service severance rule”.  Both should be ignored. As the Ontario court of Appeal said in Minott v. O’Shanter Development Company Ltd., 1999 CanLII 3686 (ON CA):

Determining the period of reasonable notice is an art not a science. In each case trial judges must weigh and balance a catalogue of relevant factors. No two cases are identical; and, ordinarily, there is no one “right” figure for reasonable notice. Instead, most cases yield a range of reasonableness.

How then should employers determine how much severance to give? For starters this shouldn’t even be a question. Savvy employers will have already inserted into their employment contracts a termination clause stating exactly what is owed. However, if no termination clause exists, and if the employer can afford ten minutes of billable time, it should consult an employment lawyer. Only an employment lawyer with expertise in (i) severance pay in Ontario timetables and in (ii) negotiation tactics for severance pay in Ontario can properly advise what to offer a terminated employee. Failing even that, without a lawyer, the employer should offer only the Employment Standards Act minimum amount of severance, plus what it thinks is the reasonable amount of time it will take the employee to find another comparable job having regard to circumstances affecting re-employment prospects.

And employers shouldn’t forget to get a signed release in case they offer a penny more than minimum severance.

Contact our employment law firm if you have a severance issue.