The Difference Between Termination Pay, Severance Pay, and a Severance Package
With some exceptions, employees who are dismissed without cause are automatically entitled to a minimum notice period calculated in accordance with Ontario’s Employment Standards Act. It is a straight-forward mathematical formula based solely on an employee’s continuous length of service.
If the employer opts to provide pay in lieu of notice, this pay is called “Termination Pay”. The maximum available notice period (or Termination Pay) under the Employment Standards Act is 8 weeks.
Under the Employment Standards Act, some employees are also entitled to additional compensation called “Severance Pay” (but don’t confuse this with “severance” or “severance package” — the terms are not interchangeable). Employees are entitled to Severance Pay if they have been with the employer for five years or more (including all the time spent by the employee in employment with the employer, whether continuous or not and whether active or not) and:
a) the employer has a payroll in Ontario of at least $2.5 million; or
b) the employer severed the employment of 50 or more employees in a six-month period because all or a part of the business closed.
Under the Employment Standards Act, Severance Pay is paid out at the rate of 1 week’s wages per year (or part year) of service, up to a maximum of 26 weeks. There are rules for the calculation of Severance Pay, which can be found on-line by visiting the Ontario Ministry of Labour’s website.
Severance Pay is intended to compensate an employee for accumulated seniority and job loss (like an earned benefit).
The term “severance package” does not have a precise meaning. It is not even defined in Ontario’s Employment Standards Act. Rather, the term “severance package” generally means a bundled package of financial compensation and benefits that an employer offers to an employee usually upon a without cause termination of employment or to entice an employee to leave.
Employees should remember that their statutory entitlements upon termination (i.e. Termination Pay and Severance Pay) are minimums only. Often employees are entitled to greater compensation under the common law doctrine of “reasonable notice”. For that reason, employees should consult with an employment lawyer to determine their full entitlements.
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