There is a very specific set of issues for displaced workers arising from the treatment of severance pay, which represents compensation for involuntary job loss in recognition of the very real costs incurred by the worker.
Under the current Employment Insurance system, a worker who is laid-off does not normally receive a regular EI benefit cheque until such time as his or her severance pay has been used up.Â Severance pay is converted into the appropriate number of weeks based on the pre-layoff rate of pay, and that number of weeks is added to the standard two-week waiting period for EI benefits.Â Thus, for example, a worker who is laid off with 6 weeks of severance pay will not receive an EI benefit for the first eight weeks following a layoff.
Receipt of severance pay does not reduce the period of maximum entitlement to EI benefits for someone who remains unemployed.Â For example, a person who qualifies for 30 weeks of benefits over a 52 week eligibility period will still qualify for a maximum period of 30 weeks after a period of using up his or her severance pay.Â However, the 60% of workers who find a new job before exhausting a claim will receive a lower combined EI and severance benefit than would otherwise have been the case.
Severance pay should not be treated in the same way as normal wages or earnings, and thus as income, but rather as compensation for the loss of a particular job.
Many workers have invested a significant period of their lives with a specific employer, and suffer a loss of an asset if they are obliged to seek new employment.Â Laid-off workers – particularly those with long tenure in a job affected by a plant closure – often experience a significant loss of income and future pension benefits in the transition from one job to another.Â The requirement to use up severance pay before collecting EI benefits erodes reasonable compensation for the very real cost of losing a specific job.
Often, particularly in the event of large layoffs and establishment closures, employers recognize the need for reasonable compensation for affected workers.Â These workers have, after all, invested in job specific skills and made a commitment to an employer in the expectation of continued employment.Â Job loss has been caused by shifts in the economic winds over which the individual workers and, often, the employer have little control.Â Companies can make efficiency and other gains through “downsizing” and often feel it is appropriate to compensate workers for the gains to the enterprise.
In his recent review of Part III of the Federal Labour Code (Chapter 8), Professor Harry Arthurs broadly endorsed the view that severance and termination pay represents compensation for economic losses, and notes that the courts now typically order quite significant amounts of pay in lieu of notice when employees are terminated for other than just cause, with settlements of 50 or more weeks being common for long-service workers who have the resources and patience to take legal action.Â “The greatest obstacle confronting discharged workers is not one made by judges, it is inherent in our system of civil litigation.Â Few ordinary workers can afford to sue.Â Litigation is too slow, risky and expensive for working people who have lost their greatest asset – their job.” In much more modest recognition of the need for compensation for involuntary job loss, legislated employment standards often provide for severance pay (e.g. 2 days per year of service, with a minimum of 5 days, in the federal jurisdiction).
However, the EI rules create a real disincentive to paying such compensation.Â An employer may reasonably ask why the enterprise should pay severance beyond the legal or contractual minimum if it will result in little or no net benefit to the laid-off worker.Â Similarly, provinces are discouraged from raising minimum severance pay requirements under employment standards if the benefit to the worker is largely recouped by the federal government’s EI program.