Tim Louis: Workers' right to severance pay

By Tim  Louis

With our economy in free fall, unfortunately many people will see their jobs disappear. The number of unemployed is increasing at one of the fastest rates on record. At times like this, workers need to have a clear understanding of their right to severance pay.

Many people are under the misunderstanding that an employer is allowed to lay off employees—without any compensation for the layoff for economic reasons if times are tough. This is not the case.

If the employer can justify the termination—that is, can point to some action on your part such as poor work performance—you are not entitled to severance pay. This situation is referred to as "termination with cause".

Where the employer cannot point to some action on your part that would justify termination, this is called "termination without cause". The fact that a business has fallen on hard times and can no longer "afford" all of its employees, does not let the employer off the hook.

The employer can lay you off but must provide adequate severance pay.

The longer you have worked for your employer, the greater the amount of severance pay you are entitled to.

Many workers are under the mistaken impression that the amount of severance pay described in the Employment Standards Act [ESA] is all that they are entitled to. You should know that the ESA only sets out the minimum amount—the "floor" of severance pay—to which you are entitled.

What many workers are not aware of is that a dismissed employee, terminated without cause, is generally entitled to severance pay in excess of what is spelled out in the Employment Standards Act.

Above this minimum is something referred to as Common Law—the body of cases that have previously come before the courts which act as a precedent. A court will look at these previous decisions to determine how much severance pay you are entitled to.

As a very rough rule of thumb, you are entitled to between four weeks and six weeks severance pay for every year you have worked for your employer.

For example if you have worked for a company for 10 years, you should be entitled to something between 40 weeks and 60 weeks of severance pay.

This would be significantly more than what the Employment Standards Act would require your employer to pay you.

If you decide that you have not been offered adequate severance pay, you can  take your employer to court.

If the court decides that you were terminated without cause, you should know that the employer is able to deduct any income that you earned or received during the notice period from the severance pay you are entitled to.

Let's go back to the example above. Suppose the court awarded you severance pay of 50 weeks.

You would be entitled to an amount of money equivalent to 50 weeks worth of pay, with a reduction of an amount equal to all income you earned or received during the first 50 weeks after you were terminated. This would include any employment insurance benefits.

One other fact to keep in mind is that any monies paid by your employer to you, either as a result of the court judgment or as a result of an out-of-court settlement, are taxable. You will have to pay income taxes on these monies.

Tim Louis is the founder of Tim Louis & Company.