Both options have respective advantages and disadvantages that vary from person-to-person and should be fully discussed with a financial planner and legal advisor before a termination agreement is finalized.
Lump Sum Payment
With respect to a lump sum payment, the advantages include:
• Usually immediate payment of the entire severance amount (no need to worry about your former employer′s financial viability over the long-term);
• More flexibility in taking advantage of favourable tax rules; and
• A lump sum payment is typically not subject to set off or reduction for mitigation income from new employment.
The main disadvantages to taking a lump sum payment over a salary continuance are:
• The lump sum package is usually discounted more than a severance package based on a salary continuance model since mitigation and or set off for new employment income is factored into the employer's reduced offer; and
• Benefits in lump sum packages are usually terminated earlier than benefits offered under a salary continuance.
With respect to a salary continuance severance package, the advantages include:
• A steady stream of regular income as if you remained at work;
• Usually benefits, E.I. and C.P.P. contributions continue to accrue;
• Usually represents a larger total severance figure than a comparable lump sum offer.
The main disadvantages to taking a salary continuance are mainly:
• You remain dependent on your former employer for income (if your former employer is in financial trouble, your fate is tied to their ongoing viability;
• Salary continuance is usually subject to set off a reduction for new employment income (e.g. you may get less); and
• You may be required to update your former employer in your job search efforts as a condition of continuing payments.
As mentioned above, in negotiating either a lump sum or salary continuance severance agreement with your former employer, it is critical to partner with your lawyer and professional financial advisor to determine which of the two options makes the most sense for you (quite apart from what your former employer is prepared to offer in the circumstances.)
Reprinted with permission from Workopolis.
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