Following a termination from employment without cause, many Ontario employers provide some form of severance or pay in lieu of notice, to the dismissed employee. More specifically, the pay in lieu of notice can take the form of salary continuance or a lump-sum severance package.
This blog discusses the differences between salary continuance and lump-sum pay in lieu of notice, including advantages and disadvantages of both structures.
Salary Continuance
In a salary continuance scenario, the employer terminates the employment relationship, but continues to pay the employee’s regular salary and benefits during the notice period.
Typically, salary continuance payments are structured in such a way that the salary continuance stops if the employee finds a comparable job. The employer then agrees to pay the employee a percentage of the balance left in the salary continuance period, as a lump sum.
Advantages
Stability:
- Salary continuance provides financial stability for the employee, as they receive a steady income stream over a defined period
Employee Well-being:
- Knowing that they have ongoing financial support can positively impact the mental and emotional well-being of employees during times of transition
Mitigating Legal Risks:
- A structured salary continuance plan may help mitigate legal risks by clearly outlining the terms and conditions of the continued payment
Disadvantages
Long-term Financial Commitment:
- For employers, salary continuance represents a long-term financial commitment, and the cost may increase if the employee’s departure extends beyond the initially agreed-upon period
Less Flexibility:
- Employees have less flexibility in managing their finances, as they receive a fixed amount over time
Tax Implications:
- Both employers and employees need to be aware of the tax implications of salary continuance payments, as they may be treated differently than lump sum payments
Lump Sum Severance Payment
In a lump sum payment scenario, the employer provides equivalent severance pay instead of working notice to the employee, or in combination with salary continuance.
The employee receives one lump sum severance package pay in the amount of notice owed.
It is important to note that the dismissed employee’s entitlements do not only encompass wages, but also benefits and perquisites, such as bonuses and commissions.
Advantages
Finality:
- Lump sum payments provide finality for both the employer and the employee. Once the payment is made, there is no ongoing financial obligation
Flexibility:
- Employees may have more flexibility in managing their finances with a lump sum payment. They can invest or use the funds as they see fit
Tax Benefits:
- Depending on the circumstances, lump sum payments may have tax advantages for both employers and employees
Disadvantages
Financial Management
- Some employees may struggle with managing a large sum of money and may not have the financial discipline to make it last over an extended period
Potential Legal Challenges
- If not structured correctly or if there are disputes over the amount, a lump sum payment could lead to legal challenges
How the team at Sultan Lawyers can help you
Whether you are an employee or an employer who needs assistance with employment matters, including choosing between lump sum payments and salary continuance payments, we would be happy to assist you. Please contact immigration and employment lawyers in Toronto Sultan Lawyers at (416) 214 5111 or here