When an employee is dismissed from their employment, the employer will often offer two (2) forms of severance payment – one lump sum payment representing all obligations to the dismissed employee; or a series of bi-weekly payments for a number of weeks. There are a number of differences between the two forms of payouts, and it is always advisable to consult with an experienced employment lawyer to determine which payment method is more beneficial given your unique situation.
With respect to lump-sum payments, they can be classified as a ‘retiring allowance,’ which is a form of payment classified by the CRA, as on account of the loss of office or employment. Retiring allowances are taxed at a lower rate than regular bi-weekly pay, as CPP and EI deductions are not remitted for these forms of payments; accordingly, they increase the net take-home pay for dismissed employees.
Salary continuance payments may be beneficial, for instance, for employees that need to accumulate a certain number of insurable hours of work prior to termination. For example, an employee that will be applying for EI Maternity Benefits requires 600 insurable hours of employment in the 52-weeks prior to the maternity leave. If the employee is terminated with less than 600 hours, they could be paid out on a salary continuance basis, which would add towards accumulating insurable hours for the purposes of receiving maternity benefits. Other employees may prefer to remain on salary continuance in order to receive some form of retirement benefits, pension vesting, or otherwise.
Accordingly, choosing between a lump sum payout or salary continuance is often dependent on numerous factors that should be considered by an employment lawyer before accepting any settlement offer.