Severance Pay in Ontario Explained

Ontario Severance Pay: Explained

In Ontario, when an employer decides to terminate an employee, it is essential for both the employer and the employee to understand their post-termination obligations. One crucial aspect of this process is severance pay, which may be mandatory in certain situations.

This article looks into the concept of Ontario severance pay, shedding light on how severance pay is calculated. We will also discuss the obligations employers have when it comes to providing severance packages and explore best practices that employers should adopt to ensure fairness and legal compliance.

Severance Pay vs. Termination Pay

It is not uncommon for people to use the term “severance” when referring to the compensation received upon employment termination. However, this is a misnomer. A more accurate term would be a “termination package.” The former typically implies a more comprehensive set of benefits, including pay in lieu of notice, severance pay (if applicable), extended healthcare coverage, or other perks. Understanding the distinction ensures clarity in discussions about the conclusion of employment.

What is Ontario Severance Pay?

In Ontario, the Employment Standards Act, 2000 (ESA) outlines the minimum requirements for severance pay. To be eligible for severance pay, an employee must meet these specific criteria:

  • Length of Employment: The employee must have worked for the employer for a minimum of five years;
  • Payroll Threshold: The employer must have a global payroll of $2.5 million or more;
  • Group Termination: An alternative way to qualify for severance pay is if the employee is part of a group termination that involves 50 or more employees within a six-month period.

It is important to be aware that there are exemptions to these criteria under the ESA. To understand your entitlement to severance pay upon termination, it is advisable to consult with a severance lawyer.

To be eligible for severance pay, your job must come to an end. Severance pay is applicable in Ontario when the employment relationship is terminated. What does this mean? In Ontario, employment is considered terminated when an employer:

  • Fires or dismisses the employee;
  • Causes the employee to resign due to constructive dismissal;
  • Lays off the employee for 34 weeks or more within a 52-week period;
  • Lays off the employee because the business is closing; or
  • Provides notice of termination, and the employee resigns during that notice period by giving their employer two weeks’ notice.

A common misconception is confusing termination pay with severance pay, but in Ontario, they are distinct. Termination pay is provided to all employees terminated without cause, while not all employees are entitled to severance pay. Severance pay eligibility is determined based on the criteria mentioned earlier. If an employee does not meet these criteria, the employer is not legally obliged to provide severance pay. However, employers have the discretion to offer additional compensation beyond the minimum severance pay required by the ESA.

Understanding the minimum requirements set by the ESA and ensuring the correct amount of severance pay is provided upon termination is essential to avoid potential wrongful dismissal claims. Whether you are an employer or an employee, it is recommended to consult with a severance lawyer to ensure compliance with the minimum termination entitlements as mandated by law.

Calculating Ontario Severance Pay under the ESA

In Ontario, severance pay is determined based on the employee’s length of service and their regular wages at the time of termination. To calculate severance pay upon termination, employers must follow a specific formula. The formula involves multiplying the employee’s regular wages for a regular work week by:

(a) The number of years of employment the employee has completed.

(b) The number of months of employment not included in point (a) that the employee has completed, divided by 12.

The Employment Standards Act sets a maximum limit of 26 weeks for severance pay under the ESA. However, if an employment contract stipulates a greater severance amount for the employee compared to the minimums outlined in the ESA, the employee is entitled to the higher amount. This ensures that employees who have negotiated more generous severance terms in their contracts receive the benefits agreed upon.

How a Severance Lawyer Can Assist Employers

For employers facing the task of terminating employees, the guidance of a severance lawyer is invaluable. Here is how a severance lawyer can help employers in the termination process:

  • Legal Compliance: Severance lawyers can ensure that employers comply with the legal requirements and obligations during terminations, reducing the risk of costly legal disputes and penalties.
  • Severance Package Evaluation: Lawyers can assess the severance packages offered to employees to determine if they meet statutory requirements and are fair and reasonable, protecting the employer’s interests.
  • Negotiation: If necessary, lawyers can negotiate with terminated employees on behalf of the employer to reach mutually agreeable severance terms, potentially avoiding costly litigation.
  • Legal Counsel: Employers can rely on severance lawyers for legal counsel and support throughout the termination process, ensuring that all actions are taken within the bounds of the law.

By working with a severance lawyer, employers can minimize legal risks, make informed decisions, and handle employee terminations in a legally compliant and fair manner. This proactive approach can save employers time, money, and the potential reputational damage associated with legal disputes.

Conclusion: Ensuring Fair Severance Practices as an Employer

For employers in Ontario, understanding and adhering to severance pay obligations is vital when dealing with employee terminations. Severance pay, distinct from termination pay, serves as financial support for longer-serving employees as they transition to new opportunities.

The baseline for severance pay entitlements is outlined in the Employment Standards Act (ESA), but it is important for employers to recognize that failing to provide the correct amount of severance can lead to legal repercussions. Legal compliance in this matter is not only ethically sound but also helps protect an employer’s reputation and financial interests.

Moreover, employers should consider the specifics of the employment contract. If the contract stipulates a higher severance pay than the ESA minimums, employers must honor these terms.

To navigate these complexities and ensure fair and lawful severance practices, both employers and employees are strongly encouraged to consult the ESA and seek legal guidance. By doing so, employers can safeguard their operations and reputation while upholding their legal responsibilities when terminating employees.

Contact Achkar Law

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Questions About Severance Pay?

Understanding severance pay is crucial for both employers and employees navigating the end of employment. At Achkar Law, we provide clear, balanced advice on severance pay entitlements and obligations under employment law. Whether you’re seeking to understand your rights or ensure compliance, our team is ready to assist.

 

Further Reading

Severance Pay Lawyer: Legal Advice on Severance Packages

Executive Severance Package: What You Need To Know

Is a Deceased Employee Entitled to Severance Pay?

Is Severance Pay Taxable in Ontario