Termination of Employment and Severance Pay

Termination of Employment and Severance Pay

In the ever-evolving landscape of employment, transitions are a part of the career journey. Whether you’re an employee facing the challenging prospect of termination or an employer seeking to navigate this process fairly, understanding termination of employment and severance pay is paramount.

If an employer terminates an employee without cause, they may be required to compensate employees with severance pay. This type of pay is different than termination or notice pay. Severance pay is offered to long-term employees who have their employment “severed.” This practice compensates an employee for losses, such as loss of seniority. An employer can provide severance pay upon termination of employment instead of the necessary termination notice.

Is Severance Pay Mandatory for All Terminated Employees?

Severance pay isn’t mandatory for all employers, especially small businesses. Typically, employers with a global payroll exceeding $2.5 million are obligated to provide severance pay. However, even if an employer has a payroll below $2.5 million, they may still need to provide severance pay if they’ve terminated at least 50 employees within six months due to a complete or partial business closure.

Meeting the monetary threshold for severance pay doesn’t mean all terminated employees get it. To qualify, an employee needs at least five years of employment.

download Exit Paths a free guide to employment terminations in Ontario

How to Calculate Severance Pay

To calculate severance pay upon termination, multiply the employee’s regular weekly wages by their total years of employment, plus any additional whole months worked in an incomplete year, divided by 12.

Under the Employment Standards Act, 2000 (the “ESA“), an employee who qualifies for severance is entitled to receive a minimum of one week’s pay per year of employment. An employee’s contract may provide more severance pay than the minimum amount required under the ESA, but it may not offer less. If an employee signs an employment contract that provides a lesser entitlement to severance pay than set out in the Act, it will not be enforceable.

The maximum severance pay an employer must provide, under the ESA, is equal to the employee’s regular weekly wages for 26 weeks.

Can Severance Pay be Combined with Termination/Notice Pay?

No, employers cannot mix severance pay with termination or notice pay. The minimum severance pay is separate from what’s outlined in the ESA or the employee’s contract. Employers should be mindful of this distinction.

Employees can opt for their severance pay to be a one-time lump sum or in installments. However, employers can’t pay it in installments without the employee’s consent. If agreed upon, these installments should not extend beyond three years.

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Contact Us

If you are an employer or employee requiring assistance with severance pay upon termination or an employee who believes you have been constructively dismissed, our team of experienced employment 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.