Distinguishing Between Termination Pay and Severance Pay

Years of Employment 26 years
Position Legal Assistant
Company Hathro Management Partnership AND Thomson, Rogers (law firm)
Issue
  1. Who is the employer?
  2. Entitlement to termination pay and severance pay under the Employment Standards Act ( “ESA”).
  3. Can termination pay and severance pay be combined or offset against each other?
  4. What is the test regarding the minimum standards?
Court’s Decision
  1. Mattiassi was employed by both Hathro and Thomson, Rogers who are both liable to Mattiassi.
  2. Yes.
  3. No.
  4. Whether the two minimum employment standard payments has been met independently of each other.
Case Name Mattiassi v. Hathro Management Partnership, 2011 CarswellOnt 11431 (Ont. Small Claims Court)

While this is a small claims court decision, Deputy Justice Prattas addressed the issues comprehensively. Employers are often confused by the distinctions between termination pay and severance pay and how they are to be applied. Additionally, this case also clarifies the court’s position on situations where a company creates a separate entity for the purposes of managing and employing the employees.

Employer

The law firm of Thomson, Rogers formed a management company, Hathro Management Partnership, to provide administrative services to the law firm. Ms. Mattiassi was employed directly by Hathro to work for Thomson, Rogers. A managing partner of Thomson, Rogers was also the president of Hathro. The court concluded that the question to be asked is “who in substance is the employer”. Liability should flow from that answer. The true employer must be ascertained on the basis of where effective control over the employee resides. An employment relationship is not simply a matter of form and technical corporate structure. The court found that both Thomson, Rogers and Hathro were the employers and both were jointly and severally liable to Mattiassi.

Entitlement under ESA

Termination Pay

When an employer fires an employee who has been continuously employed for at least 3 months, the employer must provide either:
                1.  written notice of termination (the employee works out the notice period); or
                2.  termination pay;
                3.  or a combination of both

Termination pay is forward looking. It is provided to assist the employee during a period in which new employment is sought. An employer does not have to provide the employee with a reason as to why the employment is being terminated. Termination pay must also include vacation pay on the termination pay period. Employees are also entitled to benefits during the termination notice period. These payments must be paid within 7 days or on the employee’s next regular pay date whichever is later.

The following is the minimum written termination notice periods required under the ESA:

Length of Employment Notice Required
Less than 3 months None
3 months but less than 1 year 1 week
1 year but less than 3 years 2 weeks
3 years but less than 4 years 3 weeks
4 years but less than 5 years 4 weeks
5 years but less than 6 years 5 weeks
6 years but less than 7 years 6 weeks
7 years but less than 8 years 7 weeks
8 years or more 8 weeks

 

Severance Pay

Severance pay is backwards looking. It’s purpose is to compensate an employee for years of service. An employee is entitled to severance pay under the following circumstances:

  1. Employee has been employed for 5 years or more AND
  2. Employer has:
    1. a payroll in Ontario of at least $2.5 million; OR
    2. severs employment of 50 or more employees within a 6 month period because all or part of its business closed.

The amount of severance pay is calculated as follows:

                Regular week’s wages x number of years (plus number of months divided by 12)

The maximum severance under ESA is 26 weeks. It must be paid within 7 days or in instalments if a written agreement is signed. Severance pay is in addition to any amount owing to the employee for termination pay or pursuant to an employment contract.

General Rules

  • Termination pay and severance pay are minimum employment entitlements.
  • They are independent from each other. Each must be paid where required and calculated separately.
  • You cannot deduct or offset one from the other.
  • They are not damages as they are not linked to any actual loss.
  • They must be paid to employees regardless of any loss.
  • They are not damages for wrongful dismissal.
  • They do no have to be repaid by the employee if the employee finds new employment within the calculated period.
  • You cannot contract out of or waive the minimum requirements of the ESA.
  • Employment contracts that provide for termination and severance pay that is greater than the minimums provided by the ESA are valid.

What Happened in Mattiassi v. Hathro?

Hathro provided Mattiassi with 54 weeks working notice. At the end of the working notice period, Mattiassi was provided with termination pay of 8.67 weeks.

Hathro argued before the court that Mattiassi was not entitled to her claim for severance pay of 26 weeks because the total amount of notice and pay provided to Mattiassi was 62.67 weeks. The court held that Hathro could not combine Mattiassi’s entitlement under the ESA to termination pay and severance pay. They had to be calculated separately. The result was that the termination notice of 54 weeks provided to Mattiassi was adequate as it exceeded the minimum amount of notice required under the ESA of 8 weeks. However, Hathro owed Mattiassi for severance pay for 26 weeks. The court deducted the 8.67 weeks pay Mattiassi received on termination from the 26 weeks of severance pay owed to Mattiassi.

Practical Considerations........... 

............for the Employer ...........for the Employee
  • Calculate the employee’s ESA minimum entitlement to termination notice/pay and severance pay separately. 
  • Review employment contract and ensure that the termination provisions deal with both termination and severance pay entitlement and that the amounts agreed to separately exceed the ESA requirements. 
  • Do not offset or deduct one entitlement from the other. 
  • Always consider whether the employee should be paid more than the minimum ESA amounts as common law notice for termination of employment is higher than the ESA minimums. This can often avoid the employee bringing a court action for additional termination pay
  • Review the amounts of termination/notice and severance pay being provided to you to ensure that the ESA minimum amounts are being paid to you. 
  • Remember that it is the employer’s option of whether to provide working notice or termination pay.
  • Consider whether you should be entitled to more than the ESA minimum amounts giving consideration to your age, employment position, and length of employment. You may wish to enter into negotiations with or commence legal action against your employer for additional termination pay depending on your circumstances. Another factor to consider is the employment market and how long it will take for you to obtain alternative employment.