Terminating employment is a difficult process for everyone involved, and one way to potentially make this process easier on an employee is by offering severance pay, which is simply a payment an employee receives for losing his job. Before you decide whether to offer severance pay, you need to know what you’re legally required to do and consider the pros and cons of it.
In some cases, the law requires employers to provide an employee with severance pay. This depends on several factors, which can include:
- The laws in your province
- How long the employee worked for you
- The reason for the termination of employment
- The number of employees you’re firing
- The total annual wages you pay
Severance pay is a complex topic, as the guidelines on who gets severance pay and how much they receive vary by province. When an employee is due severance pay, the standard amount is one week of pay for every year of their employment, but again, this can vary. The reason for the termination can be a deciding factor in whether severance pay is required, as employers may not need to provide severance pay when firing an employee for cause compared to firing an employee because of downsizing.
Severance Pay Is Not Termination Pay
It’s important not to confuse severance pay with termination pay. If you’ve employed someone for at least three months, then you must provide advance notice of the termination, with the degree of notice required depending on how long that employee has worked for you or the number of employees you’re firing if it’s a mass termination.
The alternative to providing this advance notice is paying the employee his full salary for the notice period. For example, if you’re legally required to provide two weeks’ advance notice, you could provide no advance notice and instead pay the employee his salary for those two weeks. If so, this termination pay is completely separate from any severance pay you offer.
Deciding to Offer Severance Pay
The legal guidelines on severance pay only stipulate the minimum you must pay a terminated employee. If you’re not required to pay anything, you could still choose to do so, and if you are, you could choose to pay more.
The benefit of offering severance pay is to create goodwill with a terminated employee during a stressful time. It’s always good when you can avoid burning any bridges, and severance pay could leave that person with a positive impression of your company. Another useful aspect of voluntary severance pay is that you can offer it in exchange for the employee signing a contract that releases you from any potential liability for wrongful termination. Even when you’re confident the termination is legal, it’s still good to cover your bases.
The only real downside to severance pay is the cost involved. If your business doesn’t have much cash available, it’s hard to justify paying an employee his salary when you’re not required to.
Before you terminate an employee, check the laws in your area on termination notice and severance pay. Once you know what’s required of your business, you can decide if you want to go above and beyond as a gesture of goodwill.