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How To Calculate Severance Pay In Ontario: Common Considerations

When an employee is dismissed from his or her employment, there are many factors that impact what s/he is owed. This includes whether the employee was dismissed for cause or without cause, and the terms of employment. Some of the most common considerations when it comes to calculating severance pay in Ontario for a non-unionized provincial employee are expanded upon below.

Is There an Employment Agreement With a Termination Clause?

One of the first questions any lawyer will ask a dismissed employee is whether s/he has an employment agreement. This is because an employment agreement establishes the rights and responsibilities of parties to the employment relationship. As such, it can limit an employee’s entitlements such as when calculating severance pay for the dismissed employee.

In an employment relationship, there is a presumption that an employee will receive a reasonable amount of notice of dismissal. However, an employment agreement can limit the amount of notice an employee is entitled to upon termination, among other things.

For example, in Ontario, the Employment Standards Act outlines the minimum amount of notice an employee must receive (if terminated without cause), which is 1 week of notice for every year of service, up to a maximum of 8 weeks. These amounts are the minimum, or the floor, of what an employee must receive upon termination.

In order to limit an employee’s entitlements upon termination, employment contracts may contain a provision called a “termination clause”. A termination clause is usually drafted in favour of the employer and to minimize what an employer owes an employee upon termination. Termination clauses often specify the amount or contain a formula for calculating severance pay in Ontario, limiting an employee’s notice or pay in lieu upon termination.

Is the Termination Clause Enforceable?

The enforceability of a termination clause is a hot topic in employment law because if a termination clause is found to be unenforceable, the employee may be entitled to significantly larger amounts of compensation. But determining the enforceability of a termination clause is no easy task – it is a moving target as the law is constantly developing.

There are many factors that impact the enforceability of a termination clause. For instance, one of the first things to look at is whether the employment agreement itself is valid. The entirety of an employment agreement may invalid if it was not entered into properly, such as if there was no consideration – that is, something of value exchanged – between the parties. 

Other factors that may render a termination clause unenforceable include where:

  • it fails to provide the same benefits during the notice period that the employee would be entitled to had they still been working (including benefits, regular bonuses etc.);
  • There is the potential for the termination clause to provide the employee with less than his/her minimum legislative entitlements;
  • It fails to provide for notice and statutory severance;
  • The employment agreement was amended to add a termination clause without providing the employee with fresh consideration;
  • The language is not sufficiently clear and unambiguous to rebut the common law presumption of reasonable notice; and
  • Either the “for cause” or “without cause” provision of the termination clause is invalid.

These listed factors are not exhaustive and analyzing termination clauses is a task that requires expertise.

If There Is No Valid Termination Clause, Then What Is the Employee Entitled to Under “Common Law”?

Where an employee is not subject to a valid termination clause, s/he may be entitled to much greater amounts based on “common law”. Common law refers to law that develops over time through decisions from cases. It is distinct from the laws enshrined in legislation or statutes.

Under common law, the length of notice an employee is entitled to upon termination is much higher. If legislative minimums are viewed as a “floor”, then common law entitlements can be viewed as a “ceiling” for the amount of notice.

There are hundreds of factors that impact the amount of notice an employee should receive at common law because it is a highly fact-specific exercise. Determining a dismissed employee’s entitlement to reasonable notice is often called an art rather than a science. However, the most common factors used come from the 1960 case called Bardal v Globe & Mail Ltd

The primary factors, often referred to as the “Bardal factors” are:

  • the character of the employment,
  • the length of service,
  • the age at the time of termination, and 
  • the availability of similar employment (having regard to the employee’s experience, training and qualifications).

Generally, the older an employee is upon termination, the more challenging it may be for him/her to find another position. As such, greater age usually increases the amount of notice an employee will be awarded. Similarly, the more years of service, seniority, and salary an employee has, the more likely that s/he will receive a higher notice period.

Although the Bardal factors are commonly used, keep in mind that the key to determining an appropriate notice period is to conduct an individualized assessment of the employee. Therefore, the weight accorded to any one of the countless factors varies greatly depending on the circumstances. As such, it is always a good idea to contact an experienced employment lawyer to assess your case and estimate what you may be entitled to upon termination.

Takeaways

If you are an employer, it is prudent to have a lawyer ensure that the amounts a dismissed employee is owed upon termination are properly calculated. In determining an appropriate amount, an experienced lawyer will consider factors including exposure to liability, litigation potential, and be able to guide you as to a reasonable calculation.

If you are an employee who has been terminated, do not sign anything upon termination. Instead, immediately seek legal advice. A lawyer can advise you on your rights, give you a sense of what you should be entitled to, or negotiate on your behalf to ensure you receive a fair severance package.

Contact Us

If you are an employer who needs to calculate severance pay in Ontario for a terminated employee, or an employee who has received a severance package and are looking to have it reviewed, 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 with same day response, visit our CLO Program page for our strategic solutions.