How to Calculate Severance Pay
What do we need to consider?
One of the most common issues to iron out after an employee is terminated is calculating Termination Entitlements. When there is no cause for termination, Termination Entitlements under the Employment Standards Act (“ESA”) must include two veins of payments: statutory notice and statutory severance. In some cases, employees are also entitled to reasonable notice at common law. This blog focuses on how to calculate statutory severance under the ESA.
The Formula: Five Years of Service and a Payroll of $2.5 Million
The ESA outlines formulas for calculating statutory notice and statutory severance. Statutory notice is straightforward: employees are owed one week per year of service up until a maximum of eight weeks. Statutory severance is a bit more complicated. The following formula is generally used: only employees with at least five years of service, working for an employer with a payroll of at least $2.5 million are entitled to statutory severance of one week per year of service, up until a maximum of twenty-six weeks. While knowing length of service is simple, figuring out whether an employer has a payroll of $2.5 million is not always an easy feat. What if the employee only worked in a small Ontario office with a few other colleagues, but that employer has multiple other offices across the country or even, globally? Do we count payroll from the other offices to determine whether the severance threshold is met? The short answer is yes.
The Entire Payroll – and Not Only the Ontario Payroll – is Used in Calculating Severance
Courts have been clear that employers’ obligation to pay statutory severance is based on the size of their entire payroll. This means that payroll due to employment outside of Ontario or even outside of Canada must be included in determining whether the employer has a $2.5 million payroll. As the Court put it in Hawkes v Max Aicher (North America) Limited, 2021 ONSC 4290:
The calculation of payroll under s. 64 of the ESA [the statutory severance provision] is not restricted to Ontario employment; employment outside of Ontario, including employment outside of Canada, must be included.
Calculating severance pay can be a national – or global – affair. Knowing how to properly account for an employer’s payroll is key knowledge that employees and employers alike should bear in mind following the end of an employment relationship.
Should you have any questions about calculating Termination Entitlements, one of our experienced employment lawyers would be pleased to assist.