Severance Pay in Ontario: What Employers Need to KnowIan
In Ontario, if an employer decides to terminate an employee, it is crucial that the employer know the obligations that must be fulfilled post-termination. In some situations, paying an employee severance pay may be mandatory.
In this article, we will explore the concept of severance in Ontario, how severance pay is calculated, employer obligations surrounding severance packages, and best practices that employers should follow to ensure fairness and legal compliance.
What is Severance Pay?
In Ontario, the Employment Standards Act, 2000 (ESA) sets out the minimum requirements for severance pay. In order to qualify for severance pay, an employee must meet the following criteria:
- They must have worked for the employer for at least five years; and
- The employer must have a global payroll of $2.5 million or more; or
- The employee must be part of a group termination of 50 or more employees within a six-month period.
There are exemptions to qualifying for severance pay under the ESA. It is best practice to consult with an employment lawyer to determine if you are entitled to severance pay upon termination.
There is a common misconception that termination pay is severance pay, which is not the case in Ontario. All employees terminated without cause are entitled to termination pay; however, not all employees are entitled to severance pay. To be eligible for severance pay, employees must meet the criteria set out above. If not, then the employer is not obligated to pay its employees severance. Nevertheless, it is within the employer’s discretion to offer employees over and above their legal severance pay obligation under the ESA.
Understanding the minimum requirement under the ESA and ensuring the correct amount of severance pay is paid upon termination is important if you wish to avoid potential wrongful dismissal lawsuits. Whether you are an employer or any employee, it is recommended that you consult an employment lawyer to ensure that you are receiving and/or providing at least the minimum termination entitlements at law.
Calculating Severance under the ESA
Severance pay is calculated based on the employee’s length of service and their regular wages at the time of termination. To calculate severance pay upon termination, an employer must multiply the employee’s regular wages for a regular work week by the sum of:
(a) the number of years of employment the employee completed; and
(b) the number of months of employment not included in point (a) that the employee has completed, divided by 12.
The maximum amount of severance pay that can be paid out under the ESA is 26 weeks. If an employment contract provides more severance to the employee than the minimums under the ESA, then the employee is entitled to the greater amount.
How an Employment Lawyer Can Help
If you are an employee who has been terminated, consult with an employment lawyer before you sign any termination paperwork. An employment lawyer can advise you regarding your entitlements, whether the package you are offered is sufficient, and your potential options to obtain more.
There are financial consequences for an employer that fails to provide its employees with their statutory minimums under the ESA. If you are an employer, an experienced litigation lawyer can help you comply with the ESA. An employment lawyer can assist you in ensuring that you comply with your obligations during the termination process.
Understanding severance pay obligations is crucial for employers in Ontario when terminating an employee. Severance pay differs from termination pay and is intended to assist longer-termed employees during their transition to finding alternative employment.
The minimum requirements for severance pay are found under the ESA. Failure to provide the correct amount of severance can result in legal consequences for employers.
While the ESA provides the minimum legal entitlements, employers should also consider if the employment contract states the employee is entitled to more than what the ESA provides.
Lastly, employers and employees are recommended to consult the ESA and seek legal guidance to ensure the correct amount of severance pay is provided.
If you are an employer or employee requiring assistance with severance upon termination or an employee who believes you have been constructively dismissed, our team of experienced employment and human rights 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.