Severance Pay vs Termination Pay in Ontario: What Employees Need to Know
“Severance package” is commonly used to describe any payment offered when employment ends.
Ontario employment law uses more precise categories. Termination pay and statutory severance pay are separate entitlements under the Employment Standards Act, 2000 [ESA]. Many employees may also have a claim for common-law reasonable notice.
Understanding the distinction is essential before signing a release.
This article addresses non-unionized employees in provincially regulated Ontario workplaces.
What Is Termination Pay in Ontario?
The ESA generally requires an employer to provide advance written notice when terminating an employee who has completed at least three months of employment.
Instead of providing the full notice period, the employer may provide termination pay. The employer can also provide a combination of working notice and termination pay.
The statutory notice period ranges from one to eight weeks, based primarily on the employee’s length of service. Certain statutory exceptions apply.
Where the employer provides termination pay, it must generally replace the regular wages the employee would have earned during the required notice period. Vacation pay is also payable on statutory termination pay.
The employer must continue making the contributions required to maintain the employee’s benefit plans throughout the statutory notice period.
Termination pay is a minimum statutory entitlement. It does not necessarily represent the full value of the employee’s claim.
What Is Statutory Severance Pay in Ontario?
Statutory severance pay is separate from termination notice and termination pay.
An employee generally qualifies where:
- the employee has completed at least five years of employment; and
- the employer has a global payroll of at least $2.5 million.
An employee may also qualify where the employer permanently discontinues all or part of its business at an establishment and 50 or more employees have their employment severed within six months as a result.
The global-payroll approach is reflected in Ontario’s current guidance and the Divisional Court’s decision in Hawkes v. Max Aicher (North America) Limited, 2021 ONSC 4290.
Statutory severance pay is calculated using the employee’s regular wages for a regular work week. The multiplier is the number of completed years of employment plus the number of completed months in the final partial year, divided by twelve.
The maximum statutory severance entitlement is 26 weeks.
Can You Receive Both Termination Pay and Severance Pay in Ontario?
Yes.
An eligible employee may receive both ESA termination pay and statutory severance pay. The obligations are legally distinct.
Termination pay replaces the statutory notice the employer did not provide. Statutory severance pay compensates qualifying long-service employees whose employment has been severed.
For example, an employee with exactly eight years of service may qualify for eight weeks of termination notice or pay. If the statutory-severance requirements are also satisfied, the employee may qualify for a further eight weeks of statutory severance pay.
Any completed months beyond the eighth year would increase the statutory-severance calculation proportionately.
What Is Common-Law Reasonable Notice?
The ESA establishes minimum standards. It does not necessarily define the employee’s full entitlement.
Unless an enforceable employment contract lawfully limits the employee’s rights, the employee may be entitled to reasonable notice at common law or damages in place of that notice.
The assessment is individualized. Relevant factors include the employee’s age, length of service, position and the availability of comparable employment in light of the employee’s experience, training and qualifications. There is no fixed formula of one month for each year of service.
Common-law damages can materially exceed the ESA minimums. However, they are not ordinarily added as an entirely separate third payment on top of every statutory amount. Termination pay and statutory severance already paid are generally credited against the broader wrongful-dismissal damages claim.
The employment contract remains central. A properly drafted termination clause may limit the employee to ESA minimums or another contractual formula. An unenforceable clause may leave the employee entitled to common-law reasonable notice.
What Should a Termination Package Include in Ontario?
The word “severance” on a termination letter does not establish what the employer has actually offered.
A proper review should separate each component:
- working notice;
- ESA termination pay;
- vacation pay on termination pay;
- benefit continuation;
- statutory severance pay;
- additional common-law or contractual compensation;
- accrued vacation pay;
- bonus, commission or incentive compensation;
- pension or retirement-plan contributions; and
- any amount conditional upon signing a release.
Reference terms, legal-fee contributions and outplacement assistance may also be negotiated. They are not automatic ESA termination entitlements.
Why Does the Release Matter in Ontario?
An employer may provide ESA minimum payments without requiring a release. Additional compensation is often made conditional upon the employee signing one.
A release usually prevents the employee from pursuing further claims arising from the employment relationship or its termination. The proposed compensation must therefore be compared with the rights being surrendered.
The employment contract, compensation structure, bonus plans, benefit coverage and mitigation position should be reviewed before the release is signed.
Using an Ontario Severance Pay Calculator
Lecker & Associates’ Ontario Severance Pay Calculator can provide a preliminary estimate based on general employment information.
The result is a starting point. It cannot determine whether the employment contract is enforceable or account for every compensation, mitigation and factual issue affecting the claim.
Lecker & Associates advises employees throughout Ontario concerning termination packages, statutory severance pay, employment contracts and wrongful-dismissal claims.
For advice concerning a termination package, contact our Toronto employment lawyers at 416-223-5391 or intake@leckerslaw.com
How Lecker & Associates Can Help
Lecker & Associates advises employees across Ontario on termination packages, wrongful dismissal claims, fixed-term contract disputes, and severance negotiations. If your fixed-term contract ended before the agreed end date, early legal review can help determine whether the employer had the right to end the contract, whether the termination clause is enforceable, and whether the offer reflects the full value of the remaining term. Our team of Toronto employment lawyers can be reached at 416-223-5391 or intake@leckerslaw.com for a confidential consultation.
FAQ: Severance Pay vs. Termination Pay in Ontario
Yes. An employee who satisfies the ESA requirements for statutory severance pay may receive it in addition to termination notice or termination pay.
The ESA notice period is primarily based on length of service and ranges from one to eight weeks. Where notice is not worked, termination pay generally replaces the regular wages payable during that period. Vacation pay and benefit-continuation obligations must also be considered.
An employee generally requires at least five years of employment. The employer must also meet the $2.5-million global-payroll threshold or the statutory permanent-discontinuance and group-severance test. Statutory exceptions may apply.
“Common-law severance” is informal terminology. The more accurate expression is common-law reasonable notice or damages in lieu of reasonable notice.
ESA severance pay is a specific statutory entitlement for qualifying employees. Common-law reasonable notice is a broader, individualized assessment.
The employer must generally continue the required benefit-plan contributions during the ESA notice period. A common-law claim may also include compensation for benefit losses over a longer reasonable-notice period, depending on the governing contract and plan terms.
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