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Severance Packages as Salary Continuance Payments

When an employee is terminated without cause from their employment in Ontario from their employer, the employee is entitled to a severance package, which, as we have discussed here, is based on a host of factors, including but not limited to the terminated employees age, length of service with the company, seniority in the company, job specialization, annual compensation, and otherwise.

In structuring severance packages to terminated employees, employers have the option to either pay severance by way of a lump sum payment or on a salary continuance basis. When paid on a salary continuance basis, an employee will continue to receive regular bi-weekly (or semi-monthly) payments, dependent on the typical process employed by company payroll.   As when the employee is employed for the company, such salary continuance payments will be subject to regular statutory deductions (i.e., income tax deductions, Canada Pension Plan contributions and Employment Insurance premiums).

Severance packages structured on a salary continuance basis are most common in a few different scenarios, including but not limited to the following:

  • Where the employee has been terminated by a business with a rather small payroll, a lump sum severance payment may not be feasible on account of cash flow constraints; as such, the employer wishes to spread out the severance obligations to the terminated employee as a function of cash flow management;
  • Where the employee has a high salary or holds a senior position with the company and has contributed a long duration of service, the severance entitlement could be substantial (typically, up to 24 months of pay). In such a case, again, the employer wishes to spread out the severance obligations.
  • The primary benefit to employers for structuring a severance package by way of salary continuance payments is when “claw-backs”, which are typically included in such packages, may allow the employer to avoid some of the severance obligations altogether.

What is a Claw-Back in a Severance Package Payable by way of Salary Continuance?

A claw-back in a severance package will usually contain language a kin to the following:

“At the date of termination, the company will provide payments equivalent to regular base salary payments, in accordance with the company’s regular payroll practices, for a period of 12 months. These payments shall continue for a period of 12 months, or until you commence alternate employment, whichever occurs first.

According to the above-referenced salary continuance severance package provision, the employee is entitled to 12 months of severance in this example, except if comparable alternate employment is secured prior to the end of the 12-months period.

Do Payments End Completely If You Secure Employment Before the end of the Salary Continuance Period?

Typically, the employers’ severance payments to the employee will cease immediately upon being notified that the employee has obtained other employment. The typical wording of the remainder of the salary continuance clause is as follows:

“Should you commence alternate employment prior to the end of the salary continuance period, all salary continuance payments will immediately cease but you will be paid a lump sum equal to fifty percent (50%) of the salary continuance payments then remaining.”

Accordingly, if the employee secures a job after 6 months of a 12-month salary continuance period, the remaining 6-months of regular salary payments remaining will transfer into a lump sum payment of three (3) months regular pay. By way of mathematical example, we note the following:

Example:

Employee earning $100,000, terminated an provided with a 12-month salary continuance period, with a 50.0% claw-back should alternate employment be secured before the end of the salary continuance payments.

Salary: $100,000            Semi-Monthly Payroll

Estimated Net Pay (after per deductions) Per Payroll Period: $2,915

Salary Continuance Period: 12 Months         No. Months to Obtain New Job: 6 Months

Total Payout at 6-month period = $17,500 (3 months pay).

What about the Employee’s Employment Standards Act (ESA) Entitlements?

As we have discussed here, an employer has a minimum obligation to an employee upon a termination without cause, which is provided for by the Employment Standards Act in Ontario. Notwithstanding an employer’s right to structure an employees severance package as a series of salary continuance payments with a claw-back in the event the employee obtains alternate employment before the end of the period, at all times the employer must satisfy the employees’ Employment Standards Act entitlements.

Accordingly, if an employee has worked for an employer for fifteen (15) years, and the employee is entitled to both termination pay and severance pay under the ESA, then the employee would be entitled to approximately 23 weeks or almost 6 months of severance. Accordingly, the 23-week statutory entitlement cannot be subject to any form of claw-back by the employer and must be guaranteed. If, for example, the employer offered a 6-month salary continuance period, with a claw-back if the employee obtained another job during this period of time, the severance package would be illegal as non-compliant with the ESA. In no circumstances can an employee receive less than their entitlements under the ESA.

What to do if you have Received a Severance Package in Ontario?

Prior to signing back a severance package, it is imperative that you obtain legal advice to ensure that your employer is complying with its obligations under the ESA and the common law in Ontario. You cannot be pressured or forced into immediately signing back a severance package; the law provides you with a reasonable amount of time to consult with a lawyer to discuss your options. The worst decision you can make is an ill-informed decision.

Accordingly, there are a host of qualified employment lawyers in Toronto and the surrounding regions. At Goldstein Law, we dedicate ourselves to superior client service and providing honest and effective advice. We will always reply to you in a timely matter and work to resolve your case so you can have peace of mind. If you are seeking an employment lawyer in the Greater Toronto Area (GTA), please contact us today for a free consultation at 647-838-6740.

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