Severance Pay and Bonuses
When an employer terminates your employment, they must give you reasonable notice. This means that they have to pay you for the time it will take you to find a new job at similar wages and conditions of employment. Many employers will go further than the minimums of the Employment Standards Act (ESA) and provide a severance package. However, some will try to avoid giving you your full entitlements by using improperly-worded termination clauses or not updating them when the law changes. If you’re in a position where an employer is trying to reduce their severance obligations, contact Knit’s employment lawyers for advice.
Most people don’t understand the differences between a severance package and a bonus. The ESA stipulates that an employee can be given up to 26 weeks of pay if they are terminated. This is the legal basis for severance pay Ontario, but common law considerations can result in a higher severance package based on various factors including length of employment, age, and difficulty finding another job.
An employee’s total compensation is usually a large part of their income, so if they lose their job they can suffer from significant financial losses. As such, it’s important to ensure that any severance packages or bonuses they receive include all forms of compensation that are payable if they were still employed, including commissions, overtime, car allowances, and bonuses. In a recent case, the Ontario Court of Appeal decided that an employer’s notional bonus payments are part of their notice period, unless they have explicit contractual terms that state otherwise.
Is Severance Pay and Bonuses Considered a Bonus?
In most cases, a severance package will include all of an employee’s remuneration that would have been earned during the notice period. This will generally include their base salary, overtime, and vacation pay. It will also often include any bonuses that were accrued in their role before they were dismissed. However, an employer can use a carefully-drafted termination clause to restrict what is paid out upon severance, such as requiring that the terminated employee be “actively employed” when the bonus is received.
The COVID-19 pandemic has affected how some employers handle their employment relationships, particularly with non-unionized employees. In some instances, a non-unionized employer might reduce an employee’s hours of work during the pandemic. The question of whether these reductions constitute cause for dismissal or constructive dismissal has been addressed in several recent decisions.
The calculation of severance pay in Ontario can vary depending on several factors, including the length of the employee’s service and the terms of their employment contract. Typically, employees are entitled to one week of severance pay for each year of service, up to a maximum of 26 weeks. However, this is a general guideline, and specific circumstances may warrant different calculations.
These decisions are significant as they set out guidelines that will impact severance, termination, and constructive dismissal rules for employees in Canada. As such, if your employer has changed your working conditions during the COVID-19 pandemic, it’s worth consulting with an employment lawyer to ensure that any change does not impose any additional legal liability upon them.