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Wrongful Dismissal

How Severance Pay is Calculated According to BC Law

In British Columbia, employment law is dictated by the Employment Standards Act (ESA). It outlines, among other employment guidelines, the rules for properly dismissing an employee in good standing, which it calls “without cause” dismissal.

While employers generally have flexibility regarding who they terminate from an employment position, such action is accompanied by certain legal requirements intended to provide an otherwise quality employee the time to prepare for being let go. Among those rules for legal “without cause” dismissal is severance compensation in lieu of notice.

What is Severance?

Severance is a cash payment made for the full sum of an employee’s outstanding regular pay, bonuses, and benefits they are entitled to upon termination from their job. Many employment arrangements in BC are contractual, and the terms of severance are likely defined within the contract. When no contract exists, as is sometimes the case, the ESA’s legal minimums apply, setting the floor for severance for those in all full-time and part-time work. Contractual severance terms are always required to be at or above standard ESA minimums.

Those not granted full notice or severance have been terminated illegally, formally called wrongful dismissal, and are owed the original compensation they were entitled. In some cases, additional damages for the larger impact the wrongful dismissal had on their life and career are awarded to victims.

ESA mandates extend to temporary residents and Canada’s HB-1 visa holders. Too many Canadians and welcomed guests, usually the most vulnerable among us, are wronged each year by unscrupulous employers who believe they can circumvent the ESA’s clear minimum severance guidelines.

Who is Entitled to Severance?

Every employee of a company operating within the boundaries of British Columbia is subject to the ESA. That means every one of their employees could be eligible for severance in lieu of legal notice. In many cases, employment contracts will outline exact termination stipulations.

The only individuals not entitled to severance pay are those who are being dismissed from their position “with cause.” With cause is the legal term for someone who has behaved in a way that legally justifies their dismissal, according to the ESA.

Severance Pay and Probationary Employment

While there are some legal questions around dismissing an employee who is on an introductory probationary period after starting a job, one thing is clear: Probationary employees are still subject to ESA guidelines.

The formal legally defined probationary period for new employees is three months. Your employer may not extend your probation with the intent of avoiding the ESA’s minimum notice or severance compensation rules. But as far as the ESA is concerned, anyone outside of that three-month period is a regular employee and is owed minimum notice or severance pay.

When is Severance Required?

In BC, severance is required when an employee in good standing with an employer is let go without ample notice. The Employment Standards Act requires the length of notice to be at least two weeks in advance to be considered an equal alternative to severance compensation. Unless an employee is fired for a specific, legal reason, usually due to poor conduct or long-term performance issues despite sufficient employer support, they will be owed either notice or severance pay.

How is Severance Calculated?

The ESA minimums for required severance pay are:

  • For 3 months of consecutive employment, at least 1 week’s notice or pay is required
  • For 12 months of consecutive employment, at least 2 weeks’ notice or pay is required
  • For 3 years of consecutive employment, an additional week’s notice or pay for each additional year of service is required, up to a maximum of 8 weeks

It should be duly noted that no current law, even the ESA, establishes an exact formula for severance pay. On an informal basis, the amount could be understood as “$0” if, instead of severance, the employer chose two weeks minimum notice instead. Keep in mind that the ESA requires one or the other. Employers cannot attempt a combination of the two in an attempt to circumvent the ESA. Severance is, therefore, required when an employer is too close to the date of termination to provide notice.

While many employers prefer notice, circumstances exist where it’s unlikely that a reasonable amount of notice could be granted, and that an employee must be awarded some form of financial compensation. This is typically true of high-level, high-wage employees with extended tenure. Cases like these, in addition to the ESA’s own design, illustrate that the appropriate amount of pay or notice can differ by job.

What Factors Impact Severance Compensation Amounts?

Severance compensation must be consistent with employment conditions, including:

  • Length of employment
  • Employee compensation
  • Hours worked per week
  • An existing employment contract
  • Common law standards

There’s no total limit on severance pay compensation.

Severance and Non-Cash Employment Benefits

More than a base pay rate is often used when determining compensation for wrongful dismissal. Non-cash compensation includes:

  • Bonuses
  • Stock options
  • RRSP contributions
  • Medical coverage and health benefits
  • Disability coverage
  • Life insurance
  • Pensions including the Canadian Pension Plan

Is Severance Pay Taxable?

Yes, severance pay is considered income, and income is taxable in BC. However, liquidated non-cash benefits such as the value of stock options repurchased by the employer may be taxable at a different rate.

How Should Severance Be Distributed?

Depending on the amount and the number of non-cash benefits included in a severance pay amount, employees might prefer to have it transferred over time, rather than all at once.

Employees can request their severance on one of three different payment schedules:

Lump-sum severance pay: This is the most common form of severance pay distribution and occurs when the total compensation is paid upfront. Severance pay is owed in full immediately following the employee’s last day. It is considered late if not transferred to the former employee within two weeks.

Severance pay as a salary: For taxation and accounting purposes, some employees may ask employers to distribute their severance package at the same regular intervals as their previous pay schedules. This schedule may have tax and accounting benefits. Keep in mind that the total severance package could result in payments higher than an original salary due to the liquidation of non-cash benefits. Employees with other sources of income can ask their former employer to deposit funds into a preferred investment or pension plan.

Deferred severance pay: For larger sums, employers and employees may receive tax benefits by issuing them over the course of several years. This affects a small number of employees.