Insights

Navigating Severance Pay: The ESA, Contract and Common Law

Published: April 29, 2024

Category: Labour and Employment

By Tahir Khorasanee

This communique explains the differences between ESA severance and notice, contractual severance and common law severance.

In the realm of employment law, navigating the intricacies of notice and severance can be a daunting task for both employers and employees. Understanding the distinctions between various forms of notice and severance—specifically those dictated by the Employment Standards Act (ESA), contractual agreements, and common law—is crucial for ensuring fair and compliant practices in the workplace.

These concepts can be confusing for the layperson – for example, in Humphrey v. Mene, 2021 ONSC 2539, Ms. Humphrey was employed for 3 years when her employment was terminated without cause. Under the ESA, her entitlements would be 3 weeks. The court found that Ms. Humphrey’s contract provided her with entitlements upon termination that fell below the ESA so it declined to enforce the termination provision, relying instead on the common law to determine that Ms. Humphrey was entitled to 12 months’ notice. Determining how the court made the jump from 3 weeks to 12 months can be confusing – it is important to first understand the basics.

Employment Standards Act Notice and Severance:

Under the Employment Standards Act (ESA) in Ontario, minimum standards are established to govern notice of termination and severance pay. Notice of termination, often referred to as termination notice or pay in lieu of notice, is the period of advance notice that an employer must provide to an employee before terminating their employment. The ESA sets out minimum notice periods based on the length of an employee's service with the employer, ranging from one week for employees with less than one year of service to eight weeks for employees with over eight years of service.

Severance pay, on the other hand, is compensation provided to employees who have been terminated without cause and meet certain eligibility criteria. The ESA stipulates that severance pay must be provided in addition to termination notice or pay in lieu thereof if an employee has worked for the employer for five or more years and the employer has a payroll of $2.5 million or more.

Contractual Notice and Severance:

Employment contracts often include provisions detailing notice periods and severance entitlements that may differ from the minimum standards prescribed by the ESA. Contractual notice, also known as notice period or termination notice, is the period of advance notice agreed upon by both parties in the employment contract. This notice period may be equal to or greater than the minimum standards set by the ESA (but not less), providing greater certainty for both employers and employees regarding the terms of termination.

Common Law Notice and Severance:

In addition to statutory and contractual entitlements, employees may also be entitled to notice and severance pay under common law principles. Common law notice is based on judicial decisions and considers factors such as the employee's age, length of service, position, and availability of comparable employment opportunities. Courts may award common law notice periods that exceed the minimum standards set by the ESA, particularly in cases where employees hold senior positions or have lengthy periods of service. This notice can range from zero to upwards of 30 months. 

Takeaways

In conclusion, navigating notice and severance in the realm of employment law requires a nuanced understanding of the distinctions between statutory, contractual, and common law entitlements. While the Employment Standards Act establishes minimum standards for notice and severance, contractual agreements and common law principles may afford employees additional rights and entitlements. 

For employers, an inappropriate offer of notice upon termination can result in wrongful dismissal claims, which costs the employer significantly more than seeking legal advice before drafting termination packages. Employers and employees alike must be aware of their rights and obligations under each framework to ensure fair and compliant practices in the workplace.