Is there a benefit to receiving severance as a lump sum?Team
If an employee is fired from their position without cause, they will be entitled to reasonable notice of termination or payment in lieu of notice. The amount of notice or payment in lieu of notice that an employee is entitled to will depend on how long that employee has been working at the company, as well as a number of other factors. In Ontario, the Employment Standards Act, 2000 (“ESA”) sets out a minimum amount of notice or payment in lieu of notice that employers must give their employees, but in some cases, employees are offered more than the minimum required under the ESA in exchange for signing a full and final release.
Most employers will choose to give payment in lieu of notice instead of working notice. This allows both the employer and employee finality and closure: they can quickly move on and find better options without suffering through awkward encounters or (from the employer’s perspective) poor work performance from an employee who knows that they have been terminated.
There are two typical ways employees receive severance pay: (i) as a lump sum payment or (ii) as a salary continuance. While both have their benefits and drawbacks, in general, it is in most cases a good idea for employees to ask for a lump sum payment.
Lump Sums Versus Salary Continuances
The amount of severance pay that an employee is entitled to under the common law will depend on a number of factors, including but not limited to the amount of time that they worked at the company, their age and skills, and their salary. The so-called “rule of thumb” of one month’s pay per year of service has been disavowed by the courts, but still tends to be a reliable predictor of common law notice periods. Keep in mind that this will vary greatly depending on the offer from an employer and the factors listed above.
Thus, for example, if an employee worked for a company for four years, then they may be able to ask for four months of severance pay. This can be given to them in two ways: as a lump sum payment or as a salary continuance.
Under a lump sum approach, the employee would receive four months of their regular salary as a single payment upon being terminated from their company. This may include bonuses and additional pay, depending on the offer.
A salary continuance would be where that employee’s regular salary is paid to them over the four month notice period, as it would be if they were still employed. Their benefits may also continue during that time. After the notice period is over, they would no longer receive their salary or any further payments.
The Benefits of a Lump Sum Payment
While both lump sum payments and salary continuances can have their benefits, in many situations taking a lump sum payment may be the better option. While it will mean that the employee has to be careful to manage their finances after receiving a large one-time payment, it can save stress in the long run.
When you receive a lump sum payment, you can ask for it to be paid into an RRSP or retirement allowance account. This will help you avoid paying large amounts of taxes on the severance payment that you receive, and it will help you make the most of the severance.
Since severance pay is meant to help employees stay on their feet during the time when they are without a job, if an employee gets a new job during the notice period, they may receive less severance pay. In general, when you are paid as a salary continuance, an employer will place an obligation on that employee to tell them if they receive a new job during the notice period. When that employee starts receiving a salary from their new job, their former employer may half their severance payments. By contrast, if an employee is paid as a lump sum, they will generally be allowed to keep the full amount, even if they get a new job during the notice period.
What Do I Do if My Employer Wants to Pay Me with a Salary Continuance?
If an employee is terminated, the first offer of severance pay for an employer may be an offer to pay that employee as a salary continuance. Meanwhile, the employee may want to be paid out in a lump sum, especially if that amount can be put into their RRSPs.
If you would like to see a different offer than what your employer presented to you, make sure to have a lawyer read over the offer to see what can be done. An employment lawyer may be able to write a demand letter to your former employer to have the amount paid out the way that you like. A lawyer may also be able to help you get more money than what was initially offered to you.
As soon as you are presented with a termination package, the best course of action is always to consult an employment lawyer as soon as possible, and especially before signing any documents, to help you assess whether you are being offered all that the law entitles you to..
As noted at the start, it is a good idea to ask for severance pay to be paid out as a lump sum so that you can get the most out of the payment, can have finality, and you won’t run into a situation where you end up getting less severance pay than initially promised.
If you are an employee who has been terminated, make sure to reach out to the qualified team at Achkar Law for help.
If you are an employer or an employee with questions about severance packages and lump sum payments, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected], and we will be happy to assist.
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