HOW DO I CALCULATE SEVERANCE IF I TERMINATE (EMPLOYER) WITHOUT CAUSE OR I AM TERMINATED (EMPLOYEE) WITHOUT CAUSE?
Navigating severance pay calculations can be a complex task for both employers and employees involved in a termination without cause. In accordance with the Employment Standards Code RSA 2000 (the “Code”), specific provisions dictate the minimum entitlements for terminated employees. This article aims to shed light on the calculation methods for severance pay under the Code and the common law. It will provide insights into the factors considered and the impact of variable pay structures. Whether you are an employer seeking guidance on fair severance practices or an employee wanting to understand your entitlements, this article will help demystify the process.
Payment Under the Employment Standards Code RSA 2000 (the “Code”).
If a company terminates the employee without cause, at the minimum, they must receive notice, or payment in lieu of notice. This in accordance with the Code section 56 unless a particular exemption is applicable.
Employer’s termination notice
“56 To terminate employment an employer must give an employee written termination notice of at least
(a) one week, if the employee has been employed by the employer for more than 90 days but less than 2 years,
(b) 2 weeks, if the employee has been employed by the employer for 2 years or more but less than 4 years,
(c) 4 weeks, if the employee has been employed by the employer for 4 years or more but less than 6 years,
(d) 5 weeks, if the employee has been employed by the employer for 6 years or more but less than 8 years,
(e) 6 weeks, if the employee has been employed by the employer for 8 years or more but less than 10 years, or
(f) 8 weeks, if the employee has been employed by the employer for 10 years or more.”
How Do I Calculate Severance Pay Under The Code?
Generally, an employer will choose to provide the terminated employee with payment in lieu of notice. Otherwise, the other option would be to provide “working notice”. As such, the calculation for the statutory minimums, or payment in lieu of termination notice, is relatively straight forward. Especially if the employee was earning a fixed salary. For example, the employee had worked for the employer for 7 years and was earning an annual income of $52,000.00. Their statutory minimums, or payment in lieu of termination notice, would be $5,000.00 less statutory deductions.
However, there are instances when an employee’s pay varies from week to week. If that is the case, the statutory minimums are based on the average pay of the 13 weeks prior to termination. Section 57 (c) of the Employment Standards Code RSA 2000 addresses this point,
“ (3) If the wages of an employee vary from one pay period to another, the employee’s termination pay must be determined by calculating the average of the employee’s wages during the previous 13 weeks in which the employee worked preceding the date of termination of employment.”
The calculation for payment in lieu of termination notice is by adding up the amount the employee had earned over the 13 weeks prior to termination. Dividing this amount by 13 will give your average. It is that average amount you apply to section 56 as noted above.
For example, the employee had earned $15,600.00 in the 13 weeks prior to termination. $15,600.00 divided by 13 equals $1,200.00. If the employee worked for 7 years, they would receive 5 weeks of termination notice. Alternatively, the employee would receive payment in lieu of termination notice in the amount of $6,000.00 less statutory deductions.
How Do I Calculate Severance Pay Under the Common Law If Pay Is Variable?
When first hired, some employees will execute an employment agreement/contract. Often these agreements include descriptions of compensation, benefits, and the employee’s duties and responsibilities.
These employment agreements may also include a “termination clause”. If the clause is enforceable, the employee will only have entitlement to termination notice, or payment in lieu of termination notice. There will be no further calculations. It is important that an employee have a lawyer review their contract to ensure the termination clause is actually enforceable.
What if there is no employment agreement or the agreement does not include a termination clause? The employee will have entitlement to “reasonable notice” in accordance with the common law. The amount of reasonable notice is based on the Bardal factors (i.e., age, years of service, title at termination).
Example:
For example, the employer terminates “Employee X” without cause effective immediately. There is no termination clause in the employment agreement. Employee X is 58 years of age, employed for 12 years, and at termination, held a middle management position. Their pay varied from month to month as they had a hybrid pay structure inclusive of salary and commissions. How do you calculate the amount of severance Employee X entitled to?
Let’s assume that the employer and Employee X agree to a reasonable common law notice period of 52 weeks (“severance”). For more information on determining a reasonable common law notice period, please see our previous posts.
Employee X will have entitlement to 8 weeks due to them having over 10 years of service as per the Employment Standards Code section 56. Due to Employee X’s pay being variable, the payment per the Code would be based on the average of the 13 weeks prior to termination as set out above.
The calculation of the remainder 44 weeks of the severance is not necessarily in the same manner as the statutory minimums. This is because the statutory minimum payment, the 8 weeks, operates under the Code. The additional 44 weeks operate under common law principles.
Under the common law, when an employee’s pay is variable, the court will apply the best method that most closely reflects what a terminated employee would have received over the notice period had they continued working but for the termination. Therefore, the determination of “best method” is on a case-by-case basis. It is typical that counsel for the employer will advocate for whatever method reflects a lower average amount of earnings. In contrast, counsel for the employee will advocate for the method that gives the largest amount of average earnings.
Let us assume Employee X earned the following for the last four years:
- 120k in 2022,
- 132k in 2021,
- 110k in 2020, and
- 80k in 2019.
Employee X, or their counsel, would want to use the average earnings for the last two years, 2022 and 2021. These would give average earnings of $126,000.00 (120k + 132k, then divided by 2). The amount owing per the common law, for the 44 weeks for Employee X, would result in a severance, in addition to the statutory minimums, of $106,615.39.
The former employer of Employee X, or their counsel, would want to use the average of the last 4 years, 2019-2022. This would give an average of $110,500.00. The 44 weeks for Employee X, using this method, would amount to a payment of $93,500.00 above the statutory minimums.
The difference in the average of the above examples is approximately $13,000.00. The different methods used in approximating earnings over the notice period can become even more skewed when earnings in a particular year, quarter, or month, are extremely low or high.
If this matter went to trial, the court again would look for the best method in assessing what Employee X would have earned had they continued working for the 44 weeks. For instance, the court would consider the following:
- whether there was an increase in the commission percentages in the later years;
- was Employee X on a medical leave at some point; or
- was there an external reason for the variation in pay and is that reason still applicable (i.e., the pandemic).
For example, if Employee X was on a medical leave for a few months in 2019, it would not be reasonable to include earnings for 2019 in assessing average earnings. If Employee X received a raise at the start of 2021, it would not be reasonable to include 2020 or 2019. The reason being that it would not reflect what Employee X would have earned during the notice period after termination.
Generally, most matters involving a termination without cause are reach settlement through negotiations between the legal counsel for each party. When pay is variable, part of those negotiations will include how to determine the best method of averaging pay. There will be review of what an employee would have received over the notice period but for the termination. This is an important aspect of negotiations which can have a significant impact on the amount of severance the employee will receive or the employer will pay.
Getting Help from Alberta Employment Lawyers
If you are an employer who is considering terminating an employee or you are a recently terminated employee, you can contact our Calgary and Edmonton office. To make things easier, we offer in person, telephone and video consultations in Alberta. For the fastest service, please email our office with a brief outline of your situation. This allows us to provide you with information and/or the ability to set up a meeting with the appropriate lawyer.
Please email us at [email protected]. Alternatively, please feel free to call us at 1-877-225-8817 from anywhere in Alberta.