How To Calculate Severance Pay?

severance agreement

Severance pay, also known as ‘severance package’ or ‘severance agreement’, refers to the sum of money an employer must pay their employee when the employee is dismissed due to no personal fault or error. The main objective of paying employees a severance pay is to allow them to cater to their immediate, day-to-day financial needs and thereby have an easier transition period.

What Qualifies as ‘Severance’?

Individuals are entitled to a severance pay if their employee:

  • Non-consensually alters the terms & conditions of employees contract in a manner which negatively affects the individual, such as a considerable reduction of their salary or any other factors which result in the employee resigning shortly thereafter. This phenomenon is also referred to as a ‘constructive dismissal’.
  • Relieves them of their duties due to the permanent or indefinite closure of the employer’s business venture or due to the employer’s financial insolvency.
  • Lays off the individual for a cumulative period of more than 34 weeks during a 52 week period.

It is important to keep in mind that individuals are only entitled to collect a severance package if they’ve completed 12 uninterrupted months of employment or more at the firm before the employer decided to terminate their employment.

How Severance Pay is Calculated:

Generally, employers calculate the approximate amount of severance fee by using the following arithmetic framework:

  • Wage amount the employee is entitled to within a regular working week multiplied by the total number of years of employment.
  • The current year of employment is also taken into consideration by dividing the number of months of employment completed by 12 and adding the resultant figure to the total number of completed years.

The following example may help you understand the methodology better:

Paul has been an employee of ABC Corporation for more than 10 years and he works 40 hours a week, wherein he makes 20$ an hour. ABC Corporation gives an eight week termination notice to Paul, who duly serves it. At the end of his notice period, Paul’s cumulative experience at the firm stands at 10 years 6 months.

So Paul’s approximate severance pay is:

  • Weekly Wage: 40 hours x $20 = $800
  • Completed years of employment: 10.
  • Current year of employment: 6/12 = 0.5.

Therefore, Paul’s approximate severance pay = Weekly wage x Total number of years of employment = $800 x 10.5 = $8400.

However, the calculation of severance pay is generally not as straightforward as this, as a variety of subjective, case-specific factors influence the nature and amount an individual is entitled to.

In terms of payment, an employer can pay the severance package as a one-shot lump-sum amount or in installments; provided the employee agrees to the same on paper. It is also imperative to note that severance pay amounts are taxable and individuals must pay income tax on the severance amount they receive.

Subjectivity: What Online Severance Pay Calculators don’t Account For!

Severance Pay Calculators

There are various online tools & severance pay calculators which help individuals calculate the approximate severance pay amount they might be entitled to by using the aforementioned formula, but in reality, there is no standard or fixed formula to calculate the exact severance pay amount as severance payouts are also dependent upon unique, individual factors.

In Canada, severance pay calculation is a complex procedure that is dependent upon factors such as the respective legal stipulations put forth by the federal or provincial government governing the region, length of the employee’s contract, nature of employment, etc. For instance, the severance package paid to a sales employee who works within a commission-based framework differs in nature & amount to the severance package paid to a non-commission-based employee.

Do you need legal specialists to negotiate a fair severance package?

Yes, ideally you should seek the services of a proven legal specialist. In fact, the Canadian government & prominent online severance pay calculators urge individuals to take reliable advice and guidance from qualified labor and employment lawyers.

This is to prevent expedient employers from taking advantage of an average employee’s lack of legal expertise. Thus, it is recommended that you have your severance agreement reviewed, analyzed, and scrutinized by legal experts before signing it.

Here are some other major benefits of hiring qualified legal professionals:

1. Simplify or remove potentially debilitating clauses:

A reputed legal expert can help you navigate through the complex legal jargon used in severance agreements. These overly complicated concepts are hard to rasp and can often negatively impact your future. A specialist can prevent your employer from extending the terms of clauses such as confidentiality or non-compete clauses and ensure that a mutual non-disparagement clause is entered, in a bid to secure your reputation and enhance your future opportunities.

2. Ensure employees pen down their oral promises:

If your employer promises you benefits but doesn’t articulate or mention them in the severance agreement then those promises hold no legal validity or enforceability. An employment lawyer can help translate those off-the-record promises into legally valid, binding, and enforceable terms and conditions.

3. Enhanced severance compensation and/or terms:

An expert can help you obtain a better severance package as well as negotiate a better payment schedule or format.

Why choose us?

Here at De Bousquet in Mississauga we have prevented many individuals from settling for unfair severance packages and have further ensured that they receive their due compensation, over the years. We recommend that you have your severance agreement reviewed by our qualified experts, who through their experience have acquired a sense of what constitutes a fair severance amount for professionals from any industry or line of work.

For further inquiries, get in touch with us.

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