severance pay calculator, termination pay, employment lawyer

The Dangers of Severance Pay Calculators

An online search for tools to calculate an employee’s severance pay will bring up multiple “calculators” to determine severance pay entitlements upon termination. Yet, many of these tools are misleading and provide an inaccurate estimate of an employee’s actual entitlements upon termination.

What is Severance Pay?

Before exploring the limits of a severance pay calculator, it is important to clarify the meaning of the term “severance pay”.

“Severance pay” is sometimes used to refer to all amounts an employer must provide an employee upon termination. This is an incorrect usage of the term, as termination pay and severance pay are distinct concepts.

Termination pay refers to the monetary amount provided in place of the required notice of termination of employment. Under Ontario’s Employment Standards Act (“ESA”), employees who have worked for at least three months and are terminated without cause are entitled to termination pay. The statutory length of notice is 1 week per year of service, up to a maximum of 8 weeks. Remember that if an employment contract does not sufficiently limit employee entitlements to the statutory minimums, then the employee will be entitled to a greater notice or pay in lieu of notice at common law.

In contrast, employment standards legislation defines severance pay as follows:

  • Under Ontario’s ESA, an employee is entitled to severance pay where s/he:
    1. Has worked for the employer for 5 or more years (whether continuous and active or not) and
    2. The employer either has a payroll of at least $2.5 million in Ontario; or the employer severed the employment of 50 or more employees in a 6-month period because all or part of the business permanently closed.
  • Under the Canada Labour Code (“CLC”), an employee is entitled to severance pay where s/he has completed twelve (12) consecutive months of continuous employment.

To be entitled to severance pay, the employee must be terminated without cause.

What Are the Problems With a “Severance Pay” Calculator?

A major problem with online severance pay calculators is that they do not actually distinguish between termination pay and severance pay. This is problematic as (almost) everyone is entitled to termination pay but far fewer people are entitled to severance pay.

Calculators also do not take into account multiple factors with varying significance or special circumstances that have a dramatic impact on an individual’s entitlements upon termination. It is nearly impossible to capture the unlimited list of factors that impact an individual’s entitlements upon termination.

The reality is that online Severance Pay calculators are more of a marketing tool for firms to get clients to book consultations. They ask for extremely basic information and generate an entitlement that tends to overestimate one’s entitlements. This can amount to an employee having an unreasonable expectation of their entitlements and employers potentially shelling out more money than they need to

How Is Severance Pay Calculated?

There are general rules that provide guidance on an employee’s statutory entitlements to severance pay.

Provincially, the ESA outlines that the maximum amount of severance pay an employee is entitled to receive is 26 weeks. There are different methods to calculate the amount of severance for employees who work a regular work week compared to those who are paid on a basis other than time worked (such as commission).

Federally, the CLC outlines that an employee is entitled to severance pay that is the greater of:

  • 2 days wages at the employee’s regular rate of wages for regular hours, in respect of each completed year of continuous employment; or
  • 5 days wages at the employee’s regular rate of wages for regular hours.

However, it is critical to remember that there are numerous factors that impact an employee’s actual severance entitlements. The amounts outlined in legislation are minimum requirements. Some employees may have much greater entitlements under common law.

What Factors Impact Severance Pay Entitlements?

There are multiple and complex exemptions that disentitle an employee to severance pay. Accordingly, the Ministry of Labour has developed a special rule tool to assist employees and employers navigate, but the exemptions contain difficult concepts that often require an experienced professional.

There are other circumstances that may limit an employee’s entitlement to severance pay, such as an employment agreement or a collective agreement.

Where an employee is entitled to severance pay, there is no set formula to calculate severance pay. Rather, there are multiple factors that impact the amount s/he receives. Main factors considered include the employee’s age, length of service, job category, and amount of time that it may take the employee to find a comparable job.

Many severance pay calculators include basic factors in their calculation. However, they do not account for the nuances of an employee’s personal situation or the changing employment landscape. For example, factors that online tools fail to consider may include the economic climate, inducement in leaving previous secure employment, specialization in a particular field, health, the nature of dismissal, among hundreds of others.

Takeaway

Using an online severance calculator may be a good starting point for some. It can assist individuals in determining if they are entitled to severance pay generally. However, when it comes to examining exemptions and/or determining the amount of severance pay, it is recommended that you seek the advice of an experienced employment lawyer. Otherwise, you may accept an offer that is an underestimate of what you may be entitled.

Contact Us

If you are an employer and need help with a workplace issue, or an employee that has been terminated, 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 would be happy to assist.

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