Sorting Out Your Severance Package

Some useful tips if you receive severance pay after being let go.

Sorting Out Your Severance Package

By Mark Swartz


To soften the blow when downsizing, employers may “offer” a severance package.

Knowing the basics about these can help you negotiate for a better deal. Canadian employment law, on the other hand, is best left to a qualified lawyer. A claw-back clause could sink your fortunes considerably, for instance.

Severance can be a lifeline, maybe even a financial opportunity. Get to know some options.


About Severance

Severance pay is money and benefits a person may be entitled to, if let go from a job “without cause” (that is, you were downsized, but not fired for a provable and legally acceptable reason). It’s meant to provide financial support to ease transition from one place of work to another.


How Much Will You Get?

According to employment law expert Howard Leavitt, the courts provide generally several times the amount required by the Employment Standards Act. It ranges from about two weeks to a month for each full year worked at that employer.

10 years of work there could bring more or less 10 months of severance pay. Many cases have settled out of court for much higher.

Length of service is one of only a hundred-fifty or so factors the courts have, over time, developed in determining appropriate severance. Equally important is the status of the employee’s position, the person’s age and how they came to join the company. The prime influencer is availability of alternate employment.


Two Different Types of Payment Possibilities

Employers pay severance in one of two ways. Either lump sum (the entire amount at one time); or over a fixed period via salary continuation. The latter might also include extended enrollment in the employer’s benefits, such as health insurance and pension contributions.

Lump sum amounts are great if they best meet your financial needs after job loss. There are tax breaks galore the more an employer transfers directly into your personal RRSP portfolio.


Before Signing A Severance Agreement

Severance agreements are legal documents. They have been prepared on behalf of the employer. Before signing this contract and agreeing in full to its terms, make sure that what’s in there – negotiated packages aren’t unusual – is sufficient for you.


Your agreement should clearly identify information on severance amounts, pension amounts if any, and other benefits or details. Depending on terms and conditions of your collective agreement or employment contract, you may be entitled to additional benefits as part of your finalized settlement.


Considering Your Severance Package Options

If you’re eligible for severance pay, your employer may decide to release funds in one of a few ways: 


  • A lump-sum payment that is subject to withholding rates.
  • Salary continuance which is taxed like regular employment income. All usual deductions apply, like Canada or Quebec Pension Plan, Employment Insurance or registered pension plans.
  • Deferred payments allow you to spread the buy-out or severance payments over more than one calendar year for advantageous tax treatment.


The way your severance amount is paid out may also have an impact on Canada Pension Plan, Quebec Pension Plan, Employment Insurance premiums and any Employment Insurance (EI) benefits you may be entitled to. Speak with a financial or tax advisor to make sure you fully understand your alternatives and their tax treatments. 


Managing Your Severance Pay

Regardless of how your severance is paid out, leverage it where possible. Paying for living expenses and building an emergency fund is standard. 

If possible, see if going further makes sense. Are there outstanding bills (that carry a high rate of annual interest) which can now be paid? What about contributing to an RRSP or RESP?


If You Can, Resist Temptation

A guaranteed amount of cash is coming to you. It’d sure be nice to downpay for a spanking new toy. However added debt is not always your friend, especially when under job-loss stress.

A severance package can bring welcome, predictable relief from money pressures. Maximizing your share could be the bridge to less worry and greater job search success.