Posted on

BARBADOS EMPLOYERS’ CONFEDERATION: Severance versus pay in lieu of notice


BARBADOS EMPLOYERS’ CONFEDERATION: Severance versus pay in lieu of notice

Social Share

WHEN IT COMES to calculating the final payments for employees leaving a company there are a few categories that employers should consider, including outstanding salary, vacation pay, notice pay and severance pay.

Most persons have no issue calculating the outstanding holiday pay and therefore this article will be devoted to understanding the differences between severance pay and notice pay and when each is applicable.

A common fallacy exists with many Barbadians believing that once they leave a company they are entitled to receive severance pay.

Severance pay is only applicable in situations of genuine redundancy; and as per the Severance Payments Act this occurs when the business ceases to operate or a position no longer exists due to obsolescence/change in function or economic activity has reduced causing a reduction in the number of staff required.

Therefore it is clear that where an employee is dismissed for performance or conduct that severance is not applicable. Additionally, it is widely believed that once an employee works for two years they become entitled to severance pay; however, the Severance Payment Act specifies 104 weeks; therefore it is possible that an employee may technically not have completed two calendar years but may have completed 104 weeks, depending on how the dates fall. However, once employed for 104 weeks then the employee upon redundancy is entitled to severance pay.

Severance payments are calculated at the rate of 2 1/2 weeks’ pay for every year of service for the first ten years of service. For the 11th to 20th year of service, it is at the rate of three weeks’ pay for each completed year.

For the 21st to 33rd year, it is calculated at 3 1/2 weeks. A week’s pay in this calculation is the average earnings of the employee over the last 104 weeks employed. It is worthy to note that severance is not payable on severance in excess of 33 years or after an employee has reached the age of entitlement to full National Insurance Scheme (NIS) pension.

It is valuable for employers to note that they are eligible to claim a rebate of 25 per cent of the severance cost from the NIS. This rebate is paid from the Severance Fund to which only employers contribute and the claim for rebate must be submitted within six months of the employee being made redundant.

When completing the Severance Rebate claim form, employers should remember that notice pay is not eligible for the rebate; the only payment that is eligible for rebate is the severance amount.

Additionally, should an employer find themselves in the position of being unable to pay the severance payment immediately, the Severance Payment Act allows a grace period of two months from the date of termination and the National Insurance Department has a facility where employees may be advanced the severance payment from the Severance Fund and the employer is required to enter an agreement for repayment.

While severance only applies in the case of redundancy, an employee is entitled to notice of their termination unless it is a situation of summary dismissal due to gross misconduct that goes to the foundation of the contract – for example, fighting.

Therefore, if an employer is required to give an employee notice of their termination and they fail to do so for whatever reason, then the employee must be receive payment in lieu of notice; commonly referred to as notice pay.

For example, if on October 31 the manager were to tell John that his employment will come to an end on November 30, then John has effectively received one month’s notice of termination. John may or may not be requested to work until November 30 and receive his salary as normal. In such a situation, John received notice of termination and therefore no notice pay is due. However, should John be told of his termination on October 31 which is to take effect immediately, he then must receive one month’s pay in lieu of notice and his date of termination remains as October 31. 

The above scenario used one month as the notice period, but it must be carefully noted that the length of notice required is stipulated in the Employment Rights Act (ERA) and/or the contract of employment. The ERA has established minimum notice periods which range from one week’s notice to 2 1/2 months’ notice depending on length of service and pay cycle. However, where a contract of employment stipulates a higher value then both parties are bound by the contract. Should the contract have a shorter notice period then the ERA will determine the notice required.

Severance payments and notice pay are tools which are designed to lessen the hardship faced by employees who are dismissed. However, this does not diminish the importance of communication in the termination process.

Communication begins when employees are made aware of business trends and changes in the business before they feel the impact and it continues straight through to the termination discussion and how the company may assist an employee in moving forward.

Sheena Mayers-Granville is human resources manager, Unicomer Barbados Ltd.