how to calculate severance pay

Five Key Factors For Ontario Severance Pay

Ontario severance pay is given to long-term employees that have had their employment “severed.” It is meant to compensate an employee for intangible losses such as loss of seniority. This type of pay is different than termination or notice pay, which is given to employees in lieu of the required working notice period an employee is entitled to upon the termination of their employment. This article outlines five key factors to severance pay in Ontario and whether you are entitled to it.

As you will see below, not all employees are entitled to severance pay. However, every employee who has been employed for at least three months is entitled to termination or notice pay. Statutory termination or notice pay entitles an employee to at least one week of pay for every year of service, up to a maximum of eight weeks of pay. However, if an employee’s contract does not limit their termination or notice pay entitlement to the minimum statutory amount, the employee will be entitled to common law termination or notice pay. An employee will generally be entitled to at least one month of pay for every year of service, up to a maximum of twenty-four months.

1. Entitlement To Ontario Severance Pay

Ontario severance pay occurs when employment is severed. Section 63 of the Employment Standards Act, 2000 (“ESA”) outlines situations where an employment relationship has been severed, which can lead to the employee being eligible for severance pay. These situations include the following:

  1. The employer lays off an employee for 35 weeks or more, within a consecutive 52-week period;
  2. The employer lays off an employee due to the permanent closure of all of the business at an establishment;
  3. The employer dismisses an employee, including where the dismissal is due to the insolvency or bankruptcy of the employer;
  4. The employer constructively dismisses an employee, and the employee provides their resignation in response and within a reasonable time; and
  5. The employer gives an employee notice of termination in writing, and the employee subsequently gives the employer two weeks’ written notice of their resignation, and the resignation then takes effect during the statutory notice period.

2. Qualification For Severance Pay

After an employee determines their employment has been severed, they must first ensure they qualify to receive severance pay. An employee qualifies for severance pay under the following circumstances:

  1. The employee’s employment is severed;
  2. They have been employed by their employer for five years or more; AND
  3. The employer:
    1. Retains a global payroll of at $2.5 million or more; OR
    2. Severed the employment of at least 50 employees within a 6-month period due to the permanent closure of all or part of the business.

3. How to Determine The Amount

In order to determine the amount of Ontario severance pay an employee is entitled to receive, an employee must multiply their regular wages for a regular workweek by the total of the number of complete years of employment and the number of complete months of employment divided by 12 for an incomplete year. 

Not every employee has a regular work week, and some employees are paid on a basis other than time. If the employee has no regular work week, or if the employee is paid on a basis other than time, the employee’s regular wages for a regular workweek are deemed to be the average amount of regular wages earned by the employee for the twelve weeks worked prior to the date on which either of the following occurred:

  1. The employee’s employment was severed, or
  2. If the employee’s employment was severed due to layoff, the date on which the lay-off began.

4. How To Calculate Severance Pay

Under the ESA, an employee who qualifies for Ontario severance pay is entitled to receive a minimum of one week’s pay per year of employment. An employee’s contract may provide more severance pay than the minimum amount required under the ESA, but it may not provide for less. If an employee signs an employment contract that provides for a lesser entitlement than set out in the ESA, it will not be enforceable.

The maximum amount of severance pay an employer can be required to pay an employee under the ESA is equivalent to the employee’s regular wages for a workweek for 26 weeks.

5. Whether It Can Be Combined With Termination/Notice Pay

Ontario severance pay cannot be combined with termination/notice pay. The minimum an employee is entitled to under the ESA is in addition to any other amount which an employee is entitled to under the ESA or under the employee’s contract. As an employer, it is important to be aware of this distinction.

An employee has the choice to receive their severance pay as a lump sum or in installments. An employer cannot pay an employee’s severance pay in installments without the employee’s consent. If an employee agrees to receive their severance pay in installments, the period over which the installments can be paid must not exceed three years.

Further Reading:

Read more about how to maximize compensation or common considerations that could affect whether an employee is entitled to a severance package below:

Contact Us

If you are an employer or an employee needing assistance with severance packages, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at 1 (800)771-7882 or email us at [email protected], and we would be happy to assist.

If you are a small or medium-sized company looking for full-service support, visit our CLO program page for strategic solutions.

Disclaimer: This blog is not intended to serve as or should be construed as legal advice and is only to provide general information. It is in no way particular to your case and should not be relied on in any way. No portion or use of this blog will establish a lawyer-client relationship with the author or any related party. Should you require legal advice for your particular situation, fill out the contact form, call (800) 771-7882 or email [email protected]