Losing a job can create immediate financial uncertainty, particularly when an employer provides a termination or severance package and asks an employee to make a decision within a limited period of time. Understanding how severance pay works in Ontario can help employees identify the questions they should ask and determine whether they may benefit from obtaining legal advice.
The term “severance” is also used in different ways. Ontario employees may have rights under the Employment Standards Act, 2000 (ESA), while some employees may have additional rights under their employment contract or the common law. The amount offered by an employer is not necessarily the full amount an employee may be entitled to receive.
What Is Severance Pay in Ontario
Under the ESA, severance pay is a payment that may be owed to an employee when their employment is severed. However, not every terminated employee qualifies for statutory severance pay.
An employee generally qualifies for ESA severance pay if they have been employed for at least five years and their employer either has a global payroll of at least $2.5 million or permanently discontinued all or part of its business at an establishment and, as a result, severed the employment of 50 or more employees within a six-month period. Certain employees are also excluded from statutory severance pay under specific exemptions.
This means that an employee can be terminated after many years of employment and still need to determine whether they meet the specific ESA requirements for statutory severance pay.
Severance Pay and Termination Pay Are Different
Severance pay and termination pay are separate concepts under Ontario employment standards legislation.
Termination pay generally refers to wages an employee receives instead of working through a required statutory notice period. An employee may be entitled to termination notice or termination pay depending on factors such as their length of employment and whether an exemption applies.
Statutory severance pay is a separate entitlement with its own eligibility requirements. An employee who qualifies may therefore be entitled to both termination pay and statutory severance pay.
Employers and employees sometimes use the word “severance” to describe the entire amount offered after a termination. However, a termination package can contain several different components. Reviewing each component separately can help an employee understand what the employer is actually offering.
Who Is Eligible for Statutory Severance Pay
The ESA establishes specific requirements for statutory severance pay.
Generally, an employee must have at least five years of employment with the employer. In addition, one of the following conditions must apply:
The employer has a global payroll of at least $2.5 million.
The employer permanently discontinued all or part of its business at an establishment and 50 or more employees had their employment severed within a six-month period as a result.
The payroll threshold is based on specific calculations under the ESA rather than simply the number of employees working at one particular location. Ontario’s legislation provides rules for determining whether an employer meets the $2.5 million threshold.
There are also exemptions that can affect an employee’s entitlement. Because these rules can become complicated, an employee should not assume that completing five years of employment automatically guarantees statutory severance pay.
How Is Statutory Severance Pay Calculated
For an employee who qualifies, Ontario’s ESA generally calculates severance pay using the employee’s regular wages for a regular work week multiplied by their completed years of employment, with an additional fraction for completed months in an incomplete year.
For example, an employee who has worked for 8 years and 6 months and whose regular wages for a regular work week are $1,500 would generally have an ESA severance calculation of:
$1,500 × 8.5 = $12,750
The ESA places a maximum of 26 weeks on statutory severance pay.
The calculation can be more complicated for employees who are paid through commissions or on a basis other than a straightforward hourly or weekly wage. Ontario’s rules provide specific methods for calculating regular wages in these circumstances.
Does Severance Pay Include Benefits
A termination package can contain more than a cash payment.
Depending on the circumstances, an employee may have questions about benefits, vacation pay, bonuses, commissions, pensions and other forms of compensation. The treatment of these items can depend on the employee’s contract, applicable legislation and the circumstances surrounding the termination.
For this reason, looking only at the dollar amount written on a severance offer may not provide a complete picture of an employee’s potential rights.
What Is Common Law Reasonable Notice
Statutory severance pay is only one part of Ontario employment law.
Some employees may have rights to reasonable notice under the common law. Common-law reasonable notice is different from the minimum notice and severance requirements established by the ESA.
The appropriate period of reasonable notice is not determined by a simple formula. Courts can consider factors such as an employee’s age, length of service, position, compensation and the availability of comparable employment. The terms of the employee’s employment contract can also be important.
An employment contract may contain a termination provision that affects an employee’s entitlement. Whether such a provision is enforceable can depend on its wording and the applicable law.
As a result, an employee should not necessarily assume that the amount of statutory severance pay is the full amount they may be entitled to receive.
What Should You Do When You Receive a Severance Package
Receiving a termination package can be stressful, particularly when an employer asks an employee to sign a release before receiving an enhanced payment.
Before signing, an employee may want to carefully review the entire package and understand what is being offered. This can include examining the termination letter, employment agreement, payment calculations, benefits arrangements and any release or other document the employer has provided.
It can also be useful to keep copies of employment-related documents, including the employment contract, amendments, pay statements, bonus information and correspondence concerning the termination.
Employees should also pay attention to any deadline for accepting the employer’s offer. A short deadline does not necessarily mean that an employee should immediately sign without reviewing the terms.
Can You Negotiate a Severance Package
A severance package is not necessarily the final amount an employee can receive.
Depending on the circumstances, an employee may have grounds to seek changes to the proposed package. The potential outcome can depend on the employee’s employment agreement, length of service, compensation, position, age, circumstances of the termination and other relevant factors.
An employee considering whether to negotiate should first understand the value and legal basis of the potential claim. Accepting or signing a release can affect an employee’s ability to pursue additional compensation later.
For this reason, employees who are uncertain about a termination package may wish to have the offer reviewed before accepting it.
When Should You Speak With an Employment Lawyer
An employment lawyer can review the circumstances of a termination and help an employee understand the potential issues affecting their situation.
Legal advice may be particularly useful when an employee has received a severance package, has been asked to sign a release, believes the proposed payment may be inadequate, has questions about an employment contract or has concerns about the circumstances surrounding the termination.
Every employment situation is different. Factors such as the employee’s position, compensation, length of service, contract and reason for termination can affect the analysis.
Frequently Asked Questions About Ontario Severance Pay
How many years do you have to work to receive severance pay in Ontario?
Under the ESA, an employee generally needs at least five years of employment to qualify for statutory severance pay. The employee must also meet additional requirements relating to the employer’s payroll or a qualifying mass termination resulting from a permanent discontinuance of business. Certain exemptions can also apply.
Is severance pay the same as termination pay?
No. Statutory severance pay and termination pay are separate entitlements under the ESA. An employee may qualify for one or both depending on the circumstances.
How much severance pay can you receive in Ontario?
For employees who qualify for statutory severance pay, the ESA generally bases the calculation on regular wages for a regular work week and the employee’s completed years and months of employment. Statutory severance pay is capped at 26 weeks.
However, an employee’s overall termination entitlement can potentially involve other forms of compensation, including termination pay or common-law reasonable notice.
Can an employer give you less severance than you are entitled to?
An employer must comply with applicable minimum employment standards. However, determining whether a particular termination package meets an employee’s legal entitlements can require reviewing the employee’s circumstances, employment contract and the terms of the package.
If you believe an employer’s offer may be incomplete or incorrect, consider obtaining legal advice before signing a release.
Should I sign my severance package immediately?
Employees should carefully review a severance package before signing it, particularly if it includes a release of legal claims. A release can have significant consequences for an employee’s ability to pursue additional compensation.
If you are uncertain about the terms of an offer, consider having the package reviewed before signing.
Can I negotiate my severance?
Depending on the circumstances, a severance package may be negotiable. Whether negotiation is appropriate and what an employee could reasonably seek depends on the employee’s individual circumstances and potential legal entitlements.
What happens if I refuse a severance package?
Refusing or not accepting an employer’s proposed package does not necessarily mean that an employee gives up all potential entitlements. However, the consequences can depend on the circumstances, the documents provided by the employer and any applicable deadlines.
Employees should obtain appropriate advice before making a decision if they are uncertain about their rights.
Get Legal Advice About Severance Pay
If you have been terminated from your employment or have received a severance package, understanding your potential rights can help you make an informed decision about what to do next.
EmploymentLawyerToronto.ca provides employment law information and legal services for employees dealing with workplace issues in Ontario. If you have questions about a severance package, termination or your potential employment law rights, consider speaking with an employment lawyer about your circumstances.
This page provides general information about Ontario employment law and is not legal advice. Employment law can depend on the specific facts of each situation.