On the not-so-simple matter of termination pay
Terminating an employee is an unfortunate and uncomfortable, but necessary action that can come about for a variety of reasons, and which employers should hope they don’t have to undertake very often. How much to pay an employee at the time of termination can be misunderstood and often viewed to simplistically by employers, which can result in exposure in the form of a wrongful dismissal complaint to the Ministry of Labour, or civil action by the former employee.
Here are the basics:
1 – an employee whose contract is permanent (not fixed-term) is entitled to termination pay (there are a few exemptions to this rule).
2 – an employer cannot include in an employment contract an agreement for an employee to receive no termination pay.
3 – generally, employees are entitled to 1 week of termination pay per year of service.
Item 3 is where things can get tricky. The one week per year principle is the bare minimum, and there are several factors that must be considered when determining whether the minimum is actually the correct amount of termination pay. These factors have been developed and repeatedly applied in case law over the years and bear consideration when terminating an employee. They include: the type of job the individual is preforming, the employee’s length of service, the employee’s age, and the availability of similar employment for the employer.
Many are surprised when they learn that the amount of notice to which a terminated employee is entitled is much higher than one week per year once the above factors have been considered.
So, with the multitude of factor combinations out there for different employees and no clear-cut guideline for how to properly determine termination pay, what can you do? My advice is always to be fair to the employee and keep in mind that paying a little more termination pay than you’d like is probably going to cost less than the cost of legal fees plus paying a settlement or decision. Further, in order to ensure that your dealings are complete, have the former employee sign an agreement which promises that no further action will be taken and that the matter of the termination is settled.
The goodwill earned by paying a little more than you may like and making sure you always part ways on good terms will, in my view, outweigh the potential cost of the legislated minimum plus the additional costs which may arise.