Severance package
A severance package is pay and benefits that employees may be entitled to receive when they leave employment at a company unwilfully. In addition to their remaining regular pay, it may include some of the following:
- Any additional payment based on months of service
- Payment for unused accrued PTO vacation time, holiday pay or sick leave unless the employee is picked up by the new buyer wherein all benefits become the responsibility of the new employer.
- COBRA insurance, or healthcare benefits through a certain period of time.
- A payment in lieu of a required notice period.
- Retirement accounts
- Stock options
- Commission payments
- Assistance in searching for new work, such as access to employment services or help in producing a résumé.
Larger severance packages were found to reduce labour market flexibility.
United States
In the United States, there is no requirement in the Fair Labor Standards Act for severance pay. Instead it is a matter of agreement between employers and employees.Severance agreements, among other things, could prevent an employee from working for a competitor and waive any right to pursue a legal claim against the former employer. Also, an employee may be giving up the right to seek unemployment compensation. An employment attorney may be contacted to assist in the evaluation and review of a severance agreement. The payments in some cases will continue only until the former employee has found another job. Employers sometimes offer a low severance package in hopes that employees will sign quickly without negotiating.
Before agreeing to anything, the employee or their attorney can evaluate whether the severance pay is fair based on your role, length of employment, and the circumstances surrounding your termination.
Severance agreements cannot contain clauses that prevent employees from speaking to an attorney to get advice about whether they should accept the offer, or speak to an attorney after they sign. The offer also cannot require that the employee commit a crime, such as failing to appear subject to court subpoena for proceedings related to the company.
It can, however, prevent the filing of a lawsuit against the company for wrongful termination, discrimination, sexual harassment, etc.
Severance packages are often negotiable, and employees can hire a lawyer to review the package, and potentially negotiate. However, employees are never entitled to any severance package upon termination or lay-offs.
Severance packages vary by country depending on government regulation. For instance, under the Age Discrimination in Employment Act, employees over the age of forty are entitled to 21 days to review and sign their severance offer. If an employer requires an employee over 40 to review and sign a severance offer in less than the compliant 21 days, they must allow employees more time to review.
In February 2010, a ruling in the Western District of Michigan held that severance pay is not subject to FICA taxes, but it was overturned by the Supreme Court in March 2014.
Puerto Rico
Employers are required to pay severance pay after an employee working in Puerto Rico is terminated. Employees are not permitted to waive this payment. Severance pay is not required if the employee was terminated with "just cause".Just cause is satisfied in any of the following situations: the employee had a pattern of improper or disorderly conduct; the employee worked inefficiently, belatedly, negligently, poorly; the employee repeatedly violated the employer's reasonable and written rules; the employer had a full, temporary, or partial closing of operations; the employer had technological or reorganization changes, changes in the nature of the product made, and changes in services rendered; or the employer reduced the number of employees because of an actual or expected decrease in production, sales, or profits.
An employee with less than five years of employment with the employer must receive a severance payment equal to two months of salary, plus an additional one week of salary for each year of employment. An employee with more than five years but less than fifteen years of employment must receive a severance payment equal to three months of salary, plus an additional two weeks of salary for each year of employment. An employee with more than fifteen years of service must receive a severance payment equal to six months of salary, plus an additional three weeks of salary for each year of employment.
Canada
The amount of severance pay an employee is owed when dismissed without misconduct varies between common law and employment law.Under employment law
In Ontario, the amount of severance pay under the employment law is given in Ontario by Employment Standards Act, which is also explained in 'Your Guide to the Employment Standards Act's Severance Pay Section'. The amount of severance pay under the employment law in Ontario may be calculated using the tool from Ontario Government. It is stated in ESA's Guide Wrongful dismissal section: "The rules under the ESA about termination and severance of employment are minimum requirements. Some employees may have rights under the common law that are greater than the rights to notice of termination and severance pay under the ESA. An employee may want to sue their former employer in court for wrongful dismissal".Under common law
Common law provides above-minimal entitlements, using a well-recognized set of factors from Bardal v Globe and Mail Ltd.. Bardal Factors include:- the length of service of the servant,
- the age of the servant,
- the character of the employment
- the availability of similar employment, having regard to the experience, training and qualifications of the servant.
The goal is to provide enough notice or pay in lieu for the employee to find comparable employment. Unlike statutory minimum notice, the courts will award much more than 8 weeks if warranted by the circumstances, with over 24 months' worth of pay in damages possible.
Other factors considered may include:
- Inducement: If you were convinced to leave a previous job for one which quickly let you go, you may be able to get extra compensation, especially if your previous position was very stable and you were not looking for a new job.
- Bad faith: If you were fired in a particularly cruel manner, harassed or lied to by your employer, extra compensation may be required. Also see Wallace v United Grain Growers Ltd.
- Duty to mitigate: You must show that you are actively looking for another job.
- Wilful misconduct by the employee: This is more than simply not doing a good job, but involves being deliberately and recklessly negligent or disobedient.
Dismissal with cause and termination without cause
In Canadian common law, there is a basic distinction as to dismissals. There are two basic types of dismissals, or terminations: dismissal with cause and termination without cause. An example of cause would be an employee's behavior which constitutes a fundamental breach of the terms of the employment contract. Where cause exists, the employer can dismiss the employee without providing any notice. If no cause exists yet the employer dismisses without providing lawful notice, then the dismissal is a wrongful dismissal.Litigation for wrongful dismissal
There is a time limit of two years from the date of termination for suing the employer in Ontario. This litigation follows civil procedure in Ontario. Before starting a court case, there are other options, such as, negotiation, mediation, and arbitration.Typically in a civil lawsuit, in 2019, it can cost $1,500–$5,000 to initiate an action and have a lawyer deliver a Statement of Claim. Responding to the opposing side's documents and conducting examinations for discovery will likely involve another $3,500–$5,000. The preparation and presentation of your case at trial is likely to add another $5,000—$15,000 to your legal costs. These legal expenses are income tax deductible.
There are free Legal information and referral services offered on a confidential basis funded from government for all areas of law in major cities, such as, Ottawa Legal Information Centre.