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When the Road Ends – Calculating Severance Due Upon Termination

Updated: Jul 27, 2020

As employment lawyers, we spend a lot of time with our employer clients to ensure they understand their obligations to employees upon termination. Some employers are surprised to find that the process of determining those obligations can be more complex than expected, requiring an analysis of legislative, contractual and common law requirements.

The following summary is applicable to non-union employees in British Columbia, and different laws will apply in other scenarios, including where a collective agreement is in force.

Exceptions: where notice or pay in lieu of notice isn’t required

Of course, not all employees are entitled to notice or pay at the end of their employment. If an employee resigns, that is a voluntary decision which generally disentitles them to any payments. Similarly, employees who are terminated for “just cause” are not entitled to notice or severance.

It is important for employers to be aware that the legal test for “just cause” is stringent, and will only be met in the case of serious misconduct. The most common examples of conduct that might meet the just cause test include serious misconduct such as theft, fraud or violence. It is very difficult to establish just cause and, therefore, it is best to get legal advice on a given scenario before proceeding; significant liability can attach to unfounded allegations of cause.

Without cause terminations

When an employer makes the decision to end employment in the absence of just cause, this is referred to as a “without cause” termination. In Canada, the vast majority of terminations are without cause, and affected employees will then be entitled to advance notice or payment in lieu of notice.

When ending employment without cause, employers are not required to provide a reason for the termination, but they must be careful that the termination is not prohibited for being discriminatory under the British Columbia Human Rights Code, or for offending other statutes including the Workers Compensation Act (i.e. sections 47 and 48). There may be significant monetary and other consequences for such terminations, even where the employee is provided with notice or severance.

To determine the amount of notice, or pay in lieu of notice, that an employer must provide to an employee, an employer must take into account the following factors:

1) Laws setting out minimum notice requirements

For employees of provincially regulated employers in British Columbia, the BC Employment Standard Act applies (the “ESA”) provides mandated minimum requirements upon a without cause termination. Similarly, for employees of federally regulated employers, the Canada Labour Code is relevant. Each of these statutes has minimum notice entitlements that must be met on termination without cause, meaning that the parties cannot ‘contract-out’ of the minimum requirements. In other words, the minimum legislated requirements must be provided to an employee, even if the employer and employee may want to agree otherwise.

2) Any written employment contract

Often, employment contracts have termination provisions setting out the amount of severance due upon termination. There are a number of reasons such clauses may be found to be unenforceable and they are best drafted by employment lawyers. For instance, the notice set out in a termination provision cannot fall below (or potentially fall below) minimum legislated notice requirements. If it does, the termination provision is invalid and the default is to the common law.

3) The common law

Employers are often dismayed to learn that common law notice is separate and apart from notice due under the ESA (or other applicable statute) and that it generally entitles employees to many times the minimum legislated requirements. For instance, even short-term employees (e.g. 3 months’ service or less) can be entitled to multiple weeks or even months of common law severance.

The ‘common law’ refers to judge-made law. In order to estimate the amount of notice required by the common law, lawyers review court decisions involving employees of similar age, length of employment and job description. Other factors are also relevant, including the availability of similar work and whether the employee was induced or enticed to join the employer.

The purpose of common law notice period is to avoid the employee suffering a loss in income while looking for new work. As such, common law severance accounts for all employee compensation including benefits, bonus, RRSP contributions and pension contributions. Also, any bad faith in the manner of dismissal may be found to be compensable by way of an extra monetary award. In order to seek common law notice from an unwilling employer, employees may decide to commence a wrongful dismissal action in court.

A properly drafted termination provision can limit an employee’s entitlements to common law severance.

Although there is no formula or ‘rule of thumb’ for accurately calculating severance entitlement, experienced employment lawyers can provide accurate estimates after reviewing the facts and applying the above factors.

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