Experiencing an unexpected termination can be challenging for any employee. A key element in navigating this situation is understanding termination pay—its rules, calculations, and implications for both employees and employers. This article simplifies Ontario’s termination pay framework, ensuring you are informed about your rights and responsibilities, and provides guidance on how to calculate termination pay based on salary and tenure.

What is Notice of Termination?

Termination pay becomes relevant when an employer decides to end an individual’s employment. The Employment Standards Act, 2000 (ESA) defines termination scenarios as:

• Dismissal by the employer, including cases involving employer bankruptcy or insolvency.
• Constructive dismissal, where significant changes to fundamental terms of employment force an employee to resign.
• Extended layoffs, exceeding the limits for temporary layoffs under the ESA.

When terminating an employee without cause, the employer must provide either:

1. Working notice – Allowing the employee to work until a specified end date, or
2. Termination pay – A lump sum payment in lieu of notice.

This ensures the employee is compensated for job loss and has time to transition to new employment.

Employers cannot terminate an employee for reasons that involve the exercise of rights under the ESA or violate the Ontario Human Rights Code, such as discrimination based on age, gender, or disability.

Who is Entitled to Termination Pay?

Employees dismissed without cause or constructively dismissed are typically entitled to termination pay. According to the ESA, this includes either:

• Working notice,
• Pay in lieu of notice, or
• A combination of both.

Exceptions include:

• Employees with less than three months of service.
• Certain industries, such as construction, where specific rules apply.

Note: Termination pay differs from severance pay. Termination pay compensates for the notice period, whereas severance pay is an additional entitlement for long-term employees under specific conditions.

Calculating Termination Pay in Ontario

Under the ESA, termination pay is based on continuous employment duration:

• Up to 1 year of service: 1 week of termination pay
• 1 to 3 years of service: 2 weeks of termination pay
• 3 to 8 years of service: Increases by 1 week per year, up to a maximum of 8 weeks

Termination pay can be provided as a lump sum, salary continuance, or periodic payments.

For employees entitled to common law reasonable notice, courts consider the Bardal factors, which include:

• Nature of the employee’s role
• Age of the employee
• Length of service
• Availability of comparable roles in the current job market

In some cases, courts may award up to 24 months of reasonable notice based on these factors.

Termination Pay vs. Severance Pay

Termination Pay: Compensation for the notice period when employment ends.

Severance Pay: Additional compensation for employees with 5+ years of service, provided the employer has a payroll of $2.5 million+ or the termination impacts 50+ employees within a 6-month window.

Severance pay recognizes long-term service and assists employees in transitioning to new opportunities. Like termination pay, severance can be issued as a lump sum or in installments.

Special Rules and Exceptions

The ESA outlines statutory minimum entitlements, but exceptions apply, such as:

• Construction employees: Not entitled to statutory termination or severance pay but may be eligible for common law reasonable notice.
• Temporary layoffs: If extended beyond 13 weeks in a 20-week period, they may qualify as constructive dismissals, triggering entitlement to termination pay.

Employers must follow ESA rules, including providing written notice. Failure to do so may result in wrongful dismissal claims.

Conclusion

Understanding termination pay in Ontario is essential for both employees and employers. The ESA sets clear minimum standards, but additional compensation may be available under common law depending on the circumstances.

• For employers, compliance with ESA regulations and careful handling of termination and severance pay is crucial to avoiding legal disputes.
• For employees, knowing your entitlements ensures you secure the compensation you deserve during a difficult transition.

If you’re uncertain about your rights or obligations, consulting a qualified employment lawyer can provide clarity and help you navigate this process with confidence.