Ontario Severance Pay
When an employer in Ontario decides to terminate an employee, understanding severance pay obligations is essential. Both employers and employees need clarity on what severance pay is, how it’s calculated, and how it differs from other forms of termination compensation to ensure fair treatment and compliance with Ontario law.
Understanding Severance Pay vs. Termination Pay
It’s common to confuse severance pay with termination pay, but they serve different purposes:
- Termination Pay is compensation provided when an employee is let go without cause and does not receive notice. The Employment Standards Act (ESA) sets minimum termination notice periods or pay in lieu of notice.
- Severance Pay, however, is an additional payment that applies to employees in specific situations, often due to long service or mass terminations. Severance pay recognizes an employee’s years of service and helps support them as they transition to new employment.
Knowing these differences can help ensure fair compensation in employment termination.
Severance Pay Requirements Under the ESA
In Ontario, severance pay is governed by the Employment Standards Act (ESA) and is required if an employee meets specific conditions. These include:
- Length of Service: The employee has worked for at least five years with the employer.
- Payroll Size: The employer has a global payroll of $2.5 million or more, or the termination is part of a group layoff involving 50 or more employees.
If these criteria are met, the employee is entitled to severance pay in addition to termination pay.
Ontario Severance Pay Chart
To help understand minimum statutory notice periods and severance entitlements under the Employment Standards Act (ESA), here is an Ontario Severance Pay Chart:
| Years of Service | Minimum Notice Required (ESA) | Severance Pay (if eligible, based on ESA conditions) |
|---|---|---|
| Less than 1 year | 1 week | Not applicable |
| 1 year | 2 weeks | Not applicable |
| 2 years | 2 weeks | Not applicable |
| 3 years | 3 weeks | Not applicable |
| 4 years | 4 weeks | Not applicable |
| 5 years | 5 weeks | 5 weeks |
| 6 years | 6 weeks | 6 weeks |
| 7 years | 7 weeks | 7 weeks |
| 8 years or more | 8 weeks | Up to 26 weeks, based on length of service |
Calculating Severance Pay in Ontario
Severance pay is calculated based on an employee’s length of service and regular wages at termination. The formula is:
Regular weekly wages × Years of service = Severance Pay
The ESA caps severance pay at a maximum of 26 weeks. However, if the employment contract includes provisions beyond ESA minimums, employees may be entitled to the higher amount specified in the contract.
Is Severance Pay Taxable?
Yes, severance pay in Ontario is subject to income tax, as it’s considered employment income by the Canada Revenue Agency (CRA). Depending on the payment structure, deductions may be applied at the source, or individuals may need to manage taxes when filing.
Common Law Notice and Severance Pay
While the ESA sets out minimum requirements, many employees are entitled to common law reasonable notice, which typically provides more generous compensation. Common law notice considers factors like:
- Length of Employment: Long-term employees may receive more extended notice.
- Age: Older employees might be entitled to more notice due to potential challenges in finding new employment.
- Position: Senior or specialized positions often involve longer notice periods.
- Availability of Similar Employment: The difficulty of securing comparable work can also affect notice duration.
Employers often include termination clauses in contracts to limit notice to ESA minimums. However, unclear or non-compliant clauses can be invalidated, entitling employees to full common law notice.
The Role of Employment Contracts in Severance Pay
Employment contracts can significantly impact severance entitlements. Termination clauses that clearly specify limits to ESA standards can limit severance liability. However, if a termination clause is ambiguous or fails to meet ESA standards, it may not be enforceable, allowing the employee to claim common law notice.
If you are unsure whether your contract limits your severance entitlements, contact Achkar Law for a review.
Mitigation of Damages
Employees entitled to common law notice have a duty to mitigate damages by actively seeking new employment. If they secure another position during the notice period, the income earned may reduce the severance amount owed. Courts assess whether employees have made reasonable efforts to mitigate their damages.
Special Considerations for Federally Regulated Employees
Federally regulated employees follow different standards under the Canada Labour Code, which may provide unique severance or notice entitlements. These employees should understand how federal rules differ from the ESA when facing termination.
Legal Support for Employers and Employees
- For Employees: If you’re facing dismissal, reviewing your employment contract, understanding your ESA and common law rights, and consulting a severance lawyer can help secure fair compensation.
- For Employers: Clear, enforceable termination clauses and compliance with ESA and common law standards are key to avoiding costly legal issues. Seek legal guidance when drafting or enforcing termination terms to ensure compliance.
Conclusion: Why Legal Guidance Matters in Severance Pay
Severance pay in Ontario requires understanding both ESA and common law requirements. For employees, consulting a severance lawyer ensures fair compensation, while employers can protect their business by following the law and offering reasonable notice of termination.
Contact Achkar Law
Whether you’re an employee facing termination or an employer managing severance, Achkar Law’s experienced severance lawyers are here to help. We can review your contract, explain your rights, and guide you through the severance process.
Call us today toll-free: 1 (800) 771-7882.
Looking for a Severance Lawyer?