Canadian HR Reporter

Canadian HR RepoRteR december 1, 2014 16 FeAtures Want to attract and retain top talent? More than just a software solution, Employer D Select equips managers by giving them access to critical, essential data that is linked to human resource management and strategic company planning. Employer D, scalable solutions from Desjardins for payroll, human resources as well as occupational health and safety management. THE END JUSTIFIES THE MEANS! desjardins.com/HR • (514) 356-5050 / 1 (888) 311-1616 It's all of Desjardins supporting your business One of the first things payroll needs to know is whether an employer is required to pay severance and, if so, what rules apply. payroll The dollars and sense of severance By Sheila Brawn t erminating an individual's employment can be a po- tential minefield — there is the human element involved and then there are the legal requirements. Payroll departments play an important role in compliance. Since payroll processes severance pay, it is important they under- stand the rules for calculating, paying and reporting it. Severance pay is different than termination pay (or wages in lieu of notice). Severance pay is paid when employees retire to recog- nize their service or for the loss of their job. Termination pay is paid to an employee who does not receive the amount of writ- ten notice required. It is usually equal to the employee's wages for a regular workweek for the num- ber of weeks of notice to which the employee is entitled. One of the first things payroll needs to know is whether an em- ployer is required to pay sever- ance and, if so, what rules apply. It is a legislated requirement in On- tario and under the Canada La- bour Code for federally regulated employers and employees. e federal code requires employers to pay severance if they terminate an employee with at least 12 con- secutive months of service (except for dismissals for just cause). e amount of severance pay required is two days of regular wages (for example, excluding overtime) for each completed year of employ- ment. e minimum amount is five days' wages. e Ontario Employment Stan- dards Act requires employers to pay severance to an employee who has worked for a minimum of five years if the employer has a total annual payroll of at least $2.5 million or 50 or more employees are being terminated in a period of no more than six months be- cause the employer is closing all or part of the business. e prov- ince's labour ministry considers an employment relationship sev- ered if: the employer dismisses or stops employing an employee (including because of bankruptcy or insolvency), constructively dismisses an employee, lays off an employee for 35 or more weeks in a consecutive 52-week period or lays off an employee because the business is shutting down. It also includes situations where an employee gets written notice of termination and the employee re- signs after providing two weeks' notice, if the resignation takes ef- fect during the notice period re- quired. In Ontario, employees are entitled to severance of one week's wages in a regular workweek for each year of employment (includ- ing partial years) up to 26 weeks. Employers may still pay sever- ance as part of an employment contract, collective agreement, out of a spirit of goodwill or to avoid potential lawsuits. When informed of a termination pack- age with severance, payroll profes- sionals should find out the date the employment relationship will end and what payments are included, says Kimberley Fiume, director of compliance/client services at LeadingEdge Payroll Group. "Knowing the actual date that the relationship severs (is impor- tant) because that allows you to then separate the payments be- tween employment income ver- sus severance," she says. The end of the employment relationship is not always the employee's last day at work, espe- cially if the employer is continu- ing to provide benefits. If benefits are not mentioned, payroll should ensure there are no benefits being provided payroll does not know about, Fiume says. "It becomes crucial to under- stand what the payment is and that we break it down appropriately." Payroll needs to know how much notice the employee is en- titled to and how much was pro- vided or whether a combination of notice and wages in lieu was used. Since wages in lieu of notice are required by law, payroll has to ensure the package has a sufficient amount to cover this. In some organizations, HR will break down the amounts for pay- roll and explain it in writing, says Fiume. In others, payroll is given an amount that needs to be paid to the departing employee. "It becomes the payroll profes- sional's responsibility to ensure, if they are just given a number, to follow up and say, 'What is this number made up of?'" she says. is is important because there are different source deduction withholdings. e Canada Rev- enue Agency (CRA) considers termination pay regular employ- ment income, subject to Canada Pension Plan contributions, em- ployment insurance premiums and income tax deductions. e CRA views severance pay as a re- tiring allowance — not pension- able or insurable, but taxable at the federal government's lump sum tax rates. Revenu Québec has a different approach. It considers wages in lieu of notice payments to be severance pay and, therefore, to be a retiring allowance rather than employment income. As a result, Quebec Pension Plan contributions do not apply to wages in lieu of notice. e pay- ments are subject to premiums for the Quebec Parental Insurance Plan and provincial income tax deductions, and to the employer contribution to the Commission des normes du travail. Since severance pay is a retiring allowance, employees have the op- tion of transferring some or all of the payment to a registered pen- sion plan (RPP) or to a registered retirement savings plan (RRSP) in which they are the annuitant if they have years of service with their employer before 1996. e severANce > pg. 17

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