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Employee Rights When a Company Closes Down in Ontario
When a company closes its operations, employees are often left wondering what happens next. Losing a job due to a business closure can create uncertainty about severance pay, termination notice, unpaid wages, and other legal rights.
In Ontario, employment laws such as the Employment Standards Act, 2000 (ESA) set minimum requirements that employers must follow when terminating employees due to a business closure.
Depending on the circumstances, employees may be entitled to:
- termination pay or notice
- severance pay
- unpaid wages and vacation pay
- benefits continuation
- employment insurance (EI)
In some cases, employees may also have rights under common law, which can result in significantly higher compensation than ESA minimums.
Understanding your rights can help ensure you receive the compensation you may be entitled to when a company closes.
What Happens to Employees When a Company Closes Down?
When a business shuts down, employees are typically terminated because their positions no longer exist.
Under Ontario law, termination due to a company closure generally requires the employer to provide:
- termination notice, or
- termination pay in lieu of notice
This compensation is meant to give employees time to transition to new employment.
The amount of notice or pay depends on factors such as:
- length of employment
- employment contract terms
- applicable employment legislation
If the employer fails to provide proper notice or compensation, employees may have claims for wrongful dismissal.
Does a Company Have to Pay Severance If It Closes?
In many situations, employees may also be entitled to severance pay when a company closes.
Under the Employment Standards Act, severance pay may apply if:
- the employer has a payroll of $2.5 million or more, and
- the employee has five or more years of service
Severance pay under the ESA is calculated as one week of pay per year of service, up to a maximum of 26 weeks.
However, ESA severance is only the minimum legal requirement.
Many employees may also have rights to common law severance, which can be significantly higher.
How Much Severance Pay Do Employees Get When a Company Closes?
Severance entitlements can vary widely.
Under common law, courts consider several factors when determining reasonable notice or severance, including:
- the employee’s age
- length of service
- position and responsibilities
- availability of similar employment
In some cases, employees may be entitled to months or even years of compensation, depending on these factors.
Employees should review their employment contracts carefully to determine whether termination clauses limit severance rights.
What Happens If a Company Goes Bankrupt?
When a company becomes insolvent or files for bankruptcy, employees may still have rights to unpaid compensation.
Employees may be able to recover:
- unpaid wages
- vacation pay
- termination pay
- severance pay
Through programs such as the Wage Earner Protection Program (WEPP).
The WEPP provides limited financial protection for employees whose employer has declared bankruptcy or entered receivership.
However, the amount recovered through WEPP may be less than what employees could otherwise claim through employment law.
What Happens if a Business Is Sold Instead of Closed?
If a business is sold rather than closed, employees may continue working for the new owner.
Ontario employment law generally recognizes continuity of employment, meaning employees may keep their original start date and years of service.
This can be important for determining future severance entitlements.
If the new employer does not retain the employee, the original employer may still owe termination pay or severance.
Temporary Closures vs Permanent Closures
Not all closures are permanent.
Some businesses temporarily shut down operations due to economic conditions or restructuring.
However, a temporary layoff can sometimes become a termination under Ontario law if it lasts longer than permitted under the ESA.
Employees affected by layoffs or closures should review their employment contracts to determine their rights.
What Should Employees Do If Their Company Is Closing?
If your employer announces a business closure, consider taking the following steps:
- Review your employment contract.
- Confirm whether termination pay or severance is being offered.
- Document communications from your employer.
- Calculate potential severance entitlements.
- Seek legal advice before signing any release or settlement agreement.
Employees are often asked to sign termination packages or release agreements, which may limit their ability to pursue additional compensation.
Frequently Asked Questions About Company Closures and Employee Rights
Employees are usually terminated because their positions no longer exist. Employers must generally provide termination notice, termination pay, or severance depending on the circumstances.
Yes, in many situations employees may be entitled to severance pay under the Employment Standards Act or common law.
Even small businesses may owe termination pay. Whether severance pay applies depends on the employer’s payroll size and the employee’s length of service.
Employees may still recover unpaid wages and certain termination entitlements through the Wage Earner Protection Program.
Employees may have legal claims if their employer fails to provide proper termination pay, severance pay, or contractual compensation.
Yes. Good Friday is a statutory holiday in Ontario under the ESA. Employees who qualify are entitled to public holiday pay.
Company Closing? Understand Your Employment Rights
When a company closes down, employees may be entitled to compensation that includes:
- termination pay
- severance pay
- unpaid wages or vacation pay
- additional common law compensation
Achkar Law assists employees across Ontario with:
- severance negotiations
- wrongful dismissal claims
- termination package reviews
- employment contract interpretation
If your employer has announced a business closure and you are unsure about your rights, speaking with an employment lawyer can help you understand your options.
Call toll-free: 1-800-771-7882
The article in this client update provides general information and should not be relied on as legal advice or opinion. This publication is copyrighted by Achkar Law Professional Corporation and may not be photocopied or reproduced in any form, in whole or in part, without the express permission of Achkar Law Professional Corporation. ©