How to Calculate Severance Pay
Most employees terminated without cause are entitled to notice of termination or pay in lieu of notice. This is often referred to as severance, severance pay, or a severance package. Employment lawyers take many factors into consideration to calculate appropriate severance. However, there are certain factors that you should know to determine how much severance an employee is entitled to:
1. Look at the Employment Contract
The employment contract signed between an employer and employee is the main criteria to determine how much severance is owed upon termination. It is at the beginning of the employment relationship, not the end, that determines how much severance pay is owed.
It is at the beginning of the employment relationship, not the end, that determines how much severance pay is owed.
To be enforceable, the employment contract must also have consideration. This means the employee must sign the contract before they begin employment.
If there is no employment contract, skip to “3. Reasonable Notice”
2. Look at the Termination Clause
If there is an employment contract, look at the termination clause to determine how much notice an employer is required to give an employee upon termination. The termination clause must provide the minimum amount of notice and severance provided under the Employment Standards Act (ESA). The minimums are:
Termination Pay: Two weeks’ pay for 1-3 years of service, and one week of pay after each year of service up to a maximum of 8 weeks’ pay;
Severance Pay: One week pay for each year of service up to a maximum of 26 weeks; and
Benefit continuation during the notice of termination period.
If the termination clause is not drafted properly such that it provides less than the ESA minimums, the termination clause is void and not enforceable. An unenforceable termination clause means the employee is entitled to reasonable notice at common law, which is generally much more than the ESA minimums.
An unenforceable termination clause means the employee is entitled to reasonable notice at common law, which is generally much more than the ESA minimums.
3. Reasonable Notice if No Employment Contract, or Void Termination Clause
If there is no written employment contract, or there is an unenforceable termination clause, most employees are entitled to reasonable notice of termination at common law. Courts have traditionally looked at the following to determine how much notice is required:
Length of Service;
Character of Employment; and
Availability of Similar Employment.
By looking at these factors, courts will try to determine how long it will take for a particular employee to find similar, comparable employment. The old rule of thumb used to be one month per year of service.
If an employer does not provide sufficient notice of termination or severance pay, the termination becomes a wrongful dismissal. The most common dispute in employment law is wrongful dismissal. Employees and employers are always trying to negotiate the proper amount of severance. Only a court can determine the proper amount and even then, different judges could arrive at different results.
If you are an employee or employer trying to determine how much severance is owed, call Jason today at (647) 242-5961 for a free consultation.