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Severance Package as Lump Sum Payment or Salary Continuance

When an employee is terminated from their employment without cause, they are entitled to a severance package. The amount of severance they are entitled to is based on the Employment Standards Act (“ESA”) in Ontario and the common law (i.e., judge-made law). The common law has evolved with various precedent cases that have set out factors that are relevant in determining a terminated employees severance pay entitlements. Common law severance entitlements are much greater than the statutory minimum entitlements outlined in the ESA.

Note that this discussion only applies to employees that have been terminated without cause from their employment. Those employees that have been terminated for just cause are not entitled to any severance; however, as we have discussed here in our article on terminated senior executive employees for just cause, and as outlined by the Supreme Court of Canada the threshold for establish just cause is very high. The onus of establishing just cause is on the employer – and if they are unable to satisfy the onus, the employee is then entitled to severance pay and was subject to a wrongful dismissal.

Are You Entitled to Severance Pay Based on the Common Law?
The analysis as to whether a terminated employee is entitled to common law “reasonable notice” of termination, over and above the minimum statutory entitlements prescribed in the ESA (which amounts to one-week per year worked of termination pay, up to a maximum of 8 weeks total; and 1 week of severance pay [subject to satisfying various conditions] up to a maximum of 26 weeks of pay) is firstly based on the terms of the employment contract.

Prudent employers will seek to include “termination clauses” in employment contracts which limit the amount of severance an employee is entitled to upon the without cause termination of employment. The specific language of the clause is very important in determining its enforceability; as such, it is important that employees reach out to a qualified employment lawyer to review the terms of contract. If such clauses are deemed enforceable, which is based on the strict language of the clause, then the employees entitlement upon termination will be limited. If, however, there is an argument that the clause would be unenforceable, this can often mean 10’s of thousands of additional severance entitlements for the employee.

If you are deemed entitled to reasonable notice of termination based on the common law, the employer can pay out your severance in one of two ways: (i) on a lump sum basis; and (ii) on a salary continuance basis. The employer does not have the obligation to pay employees on a lump sum basis despite the oft-held preference. With respect to salary continuance severance payouts, employers will often include a “claw-back” clause, which serves to reduce the remaining severance payments (i.e., by 50.0% of the amounts owing) should the employee secure comparable employment during the notice period.

This clawback clause relates to the employees duty to mitigate its damages following the termination of employment – by seeking out new and comparable employment. The language behind the salary continuance clauses and the severance package agreements in generally should be reviewed by an employment lawyer in the province in which you reside to ensure you are protected to the fullest extent of the law.

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