Navigating the intricacies of severance pay laws in Ontario can be daunting, especially during challenging times when employment comes to an unexpected end. Whether you’re an employee facing termination or an employer needing clarity, understanding the basic principles of severance pay is crucial. This guide aims to demystify the severance pay laws in Ontario, making the concept more accessible for everyone. You can contact us for a free consultation.

What is Severance Pay?

Employers provide severance pay as a compensation package to employees when they are let go from their job. It aims to help employees transition to new employment without experiencing financial hardship. Many people confuse severance pay with termination pay, but they are distinct; termination pay is what employers pay in place of notice when they let an employee go without the proper notice period.

The Purpose of Severance Pay

Severance pay serves as a financial buffer for employees during the transition period between jobs. This financial assistance helps mitigate the immediate impact of job loss, providing employees time to search for new employment without the immediate pressure of financial instability. It also reflects the employer’s recognition of the employee’s service and contribution to the company.

Differences Between Severance and Termination Pay

While both severance pay and termination pay are related to employment termination, they serve distinct purposes. Termination pay is compensation for the lack of notice or insufficient notice period provided to the employee. In contrast, severance pay is a reward for long-term service and is mandated by law under specific conditions. Understanding these differences is crucial for both employers and employees to ensure compliance with employment laws.

Legal Framework Governing Severance Pay

Severance pay in Ontario is primarily governed by the Employment Standards Act (ESA). This legislation outlines the specific conditions under which severance pay is mandated and provides a framework for calculating entitlements. Familiarity with the ESA is essential for both employers and employees to understand their rights and obligations concerning severance pay.

Types of Severance Pay

In Ontario, severance pay can include several components, such as:

• Basic severance pay: A lump sum payment based on the length of service.
• Benefits continuation: Some employers may choose to extend benefits for a period after termination.
• Bonuses or commissions: If included in the employment contract, these might also be part of severance.

Basic Severance Pay

Basic severance pay is the most common form of severance, calculated based on the employee’s length of service. It is typically provided as a lump sum payment, offering immediate financial relief. The amount is determined by multiplying the number of years the employee has worked by their weekly earnings, up to a maximum set by the ESA. Try our severance calculator here.

Benefits Continuation as Severance

Some employers opt to extend certain benefits as part of the severance package. This can include health insurance, dental coverage, or other employee benefits that were available during employment. Benefits continuation can provide additional security and peace of mind for the employee during their transition period.

Inclusion of Bonuses or Commissions

In some cases, bonuses or commissions may be included in the severance package. This inclusion depends on the terms outlined in the employment contract. If bonuses or commissions were a regular part of the employee’s compensation, they might be considered in severance calculations, ensuring the employee receives a comprehensive package.

Who is Entitled to Severance Pay?

Not all employees are entitled to severance pay in Ontario. The Employment Standards Act (ESA) outlines specific criteria for eligibility:

• The employee must have worked for the employer for five or more years.
• The employer has a payroll of at least $2.5 million in Ontario.
• Severance is also applicable if 50 or more employees are terminated within a six-month period due to a business closure.

Employment Standards Act (ESA) Criteria

The ESA sets clear guidelines for who qualifies for severance pay. Employees must meet specific tenure and employer size requirements to be eligible. This ensures that severance pay is reserved for employees who have provided significant service to larger employers.

Payroll Threshold for Employers

For an employer to be required to pay severance, they must have a payroll of at least $2.5 million in Ontario. This requirement ensures that severance pay is financially manageable for employers and is generally applicable to larger businesses with more substantial financial resources.

Mass Termination Conditions

In situations where 50 or more employees are terminated within a six-month period due to business closure, additional severance provisions may apply. This provision is designed to protect employees in mass layoff situations, ensuring they receive fair compensation when large-scale terminations occur.

How to Calculate Severance Pay in Ontario

Calculating severance pay involves several steps and considerations. Generally, eligible employees receive one week’s pay for each year of service, up to a maximum of 26 weeks.

Step-by-step Calculation

1. Determine Eligibility: Confirm that the employee meets the ESA criteria for severance. This is the first and most crucial step, as eligibility determines whether the employee is entitled to severance pay.
2. Calculate Length of Service: Include all years of continuous employment. It’s important to account for any gaps or breaks in service that might affect the total years calculated for severance purposes.
3. Weekly Earnings Calculation: Use the regular wages as a basis for calculation. This includes the basic salary and any regular bonuses or commissions, ensuring the severance amount reflects the employee’s typical earnings.
4. Multiply Completed Years by Weekly Earnings: Multiply the number of completed years by the weekly earnings to determine the total severance pay. This calculation provides a clear and straightforward method to ensure the employee receives the correct entitlement.

Considerations for Accurate Calculation

Accurate severance calculation requires attention to detail and an understanding of any specific clauses in the employment contract that might affect severance. Employers should ensure they have complete and accurate records of the employee’s tenure and earnings to avoid disputes or errors in calculation.

Example Calculation

For example, if an employee has worked for 10 years and their average weekly earnings are $1,000, they would be entitled to $10,000 in severance pay. This straightforward calculation highlights the importance of understanding both the length of service and average weekly earnings.

When is Severance Paid Out?

Lump Sum vs. Salary Continuance

Employers may choose between offering severance as a lump sum or as a salary continuance. A lump sum provides immediate financial assistance, while salary continuance mimics regular paychecks, offering a sense of normalcy for the employee during the transition period.

Timing of Severance Payments

The timing of severance payments can vary based on employer policies and the terms outlined in the severance agreement. It’s important for employees to understand when they can expect to receive their severance to plan accordingly.

Impact of New Employment on Severance

In most cases, receiving severance pay does not stop if you find another job. Severance is designed to compensate for past service, not future earnings. However, some severance agreements may include clauses that reduce payments if you obtain new employment. Employees should carefully review their severance agreements to understand any potential impacts of new employment on their severance benefits.

Maximum Severance in Ontario

Under Ontario’s Employment Standards Act (ESA), employees with 26 years or more of service with a company can receive severance pay capped at a maximum of 26 weeks.

In contrast, common law has historically set a severance limit at 104 weeks (or two years). However, recent cases have shown that courts may extend this limit in certain exceptional situations. In Lowndes v. Summit Ford Sales Ltd., 2006 CanLII 14 (ON CA), Justice Cronk clarified in paragraph 11 that while reasonable notice is case-specific and lacks an absolute cap, a notice period exceeding 24 months is generally reserved for exceptional circumstances.

Following this reasoning, the Court of Appeal in Lowndes determined a 28-month notice period was appropriate, a stance later affirmed in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79. Justice Gillese, at paragraph 31, highlighted that extraordinary factors—such as the Keenans’ age, tenure, and job roles—justified notice beyond the standard 24-month limit.

Further emphasizing this principle, the Court of Appeal in Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512, referenced Lowndes and Keenan to reaffirm that while the 24-month threshold generally applies, it can be exceeded where exceptional circumstances, such as advanced age and lengthy service, are present.

Tax on Severance Pay in Ontario

Severance pay is considered taxable income in Canada. Employers are required to withhold taxes from the severance payout. The amount of tax withheld depends on the total severance amount and the employee’s tax bracket. For specific advice on tax implications, consulting with a tax professional is recommended.

Tax Withholding Requirements

Employers have a legal obligation to withhold taxes on severance payments. The amount withheld is based on the severance amount and the employee’s tax situation. Employees should be prepared for this deduction and may want to plan their finances accordingly.

Impact of Severance on Tax Bracket

Receiving a severance payout can temporarily increase an employee’s income for the year, potentially affecting their tax bracket. It’s important for employees to understand how this might impact their overall tax liabilities and consider options for mitigating any adverse effects, such as contributing to retirement savings plans.

Seeking Professional Tax Advice

Given the complexities of tax regulations, consulting with a tax professional can provide valuable insights into the tax implications of severance pay. A tax professional can help employees navigate their specific situation and explore potential strategies for minimizing tax liabilities.

Do You Get Severance When Laid Off?

Being laid off due to lack of work or company downsizing does not automatically entitle an employee to severance pay. Eligibility depends on the same criteria outlined in the ESA. However, many employers offer severance packages as part of a layoff to maintain goodwill and mitigate potential legal claims.

Layoffs and Severance Eligibility

Eligibility for severance in layoff situations remains dependent on the ESA criteria. Employees should not assume automatic eligibility and should review the specifics of their employment situation and contract to determine their rights.

Employer Discretion in Severance Offerings

While not required by law, some employers may choose to offer severance packages during layoffs to foster goodwill and maintain positive relationships with former employees. Offering severance can also help mitigate the risk of potential legal disputes arising from the layoff process.

Legal Considerations for Employers

Employers considering offering severance during layoffs should ensure that any severance agreements are clear, fair, and compliant with legal standards. Consulting with an employment lawyer can help employers navigate the complexities of layoff-related severance offerings.

Does Severance Pay Include Benefits?

Severance pay itself is a monetary compensation, but employers may choose to extend benefits as part of the severance package. This can include health insurance, dental coverage, or other benefits the employee received while employed. The specifics should be outlined in the severance agreement.

Types of Benefits Commonly Extended

Common benefits extended as part of a severance package include health insurance, dental coverage, life insurance, and pension contributions. These benefits often provide additional security for employees during the transition period and are frequently negotiated as part of the severance package.

Importance of a Detailed Severance Agreement

A detailed severance agreement should clearly outline the specific benefits included in the severance package. Employees should carefully review the agreement to ensure they understand what benefits are being extended and for how long.

Negotiating Benefits in Severance Packages

Employees may have the opportunity to negotiate the inclusion of certain benefits in their severance package. Engaging in open and transparent discussions with the employer can lead to mutually beneficial arrangements that support the employee’s transition to new employment.

Severance Pay vs Termination Pay

While both severance and termination pay are provided upon employment termination, they serve different purposes:

• Severance Pay: Rewards long-term service and is mandated by law under specific conditions.
• Termination Pay: Compensates for lack of notice, applicable to all employees regardless of service length if terminated without notice.

Key Differences Between Severance and Termination Pay

Understanding the key differences between severance and termination pay is crucial for both employers and employees. Severance pay is a reward for long-term service and is subject to specific eligibility criteria, while termination pay is compensation for the lack of notice and is applicable to all employees under certain conditions.

Legal Obligations for Employers

Employers have distinct legal obligations regarding severance and termination pay. Compliance with these obligations is essential to avoid potential legal disputes and ensure fair treatment of employees. Employers should be familiar with both severance and termination pay requirements to fulfill their legal responsibilities.

Employee Rights and Expectations

Employees should understand their rights and expectations concerning severance and termination pay. Employees who understand the differences between the two can navigate the termination process more effectively and ensure they receive the compensation they are entitled to.

Do Small Businesses Have to Pay Severance?

If small businesses in Ontario do not meet the $2.5 million payroll threshold, they may not be required to pay severance. However, they are still obligated to provide termination pay if proper notice is not given. It’s essential for small business owners to understand these distinctions to ensure compliance with the ESA.

Payroll Threshold and Its Implications

The $2.5 million payroll threshold plays a key role in determining whether small businesses must pay severance. Businesses that fall below this threshold may be exempt from severance obligations but must still adhere to termination pay requirements if notice is not provided.

Termination Pay Obligations for Small Businesses

Even if small businesses are exempt from severance pay, they must still fulfill termination pay obligations if they do not provide proper notice. Understanding these obligations is crucial for small business owners to avoid potential legal issues and ensure fair treatment of employees.

Strategies for Small Business Compliance

Small business owners can take proactive steps to ensure compliance with employment laws, including reviewing employment contracts, consulting with legal professionals, and staying informed about changes in employment standards. These strategies can help small businesses navigate their obligations and maintain positive employer-employee relationships.

How Much Severance Pay Should I Get in Ontario?

The amount of severance pay varies based on several factors, including:

• Length of service
• Employee’s role and salary
• Industry standards

Consulting with an employment lawyer can provide a clearer picture of what one might expect in terms of severance pay based on individual circumstances.

Factors Influencing Severance Pay Amounts

The amount of severance pay an employee is entitled to depends on several factors. Length of service, the employee’s role and salary, and industry standards all play a role in determining the appropriate severance amount. Understanding these factors can help employees set realistic expectations.

Role of Employment Contracts in Severance Determination

Employment contracts can significantly impact severance pay calculations. Contracts that outline specific severance terms or conditions can affect the final amount an employee receives. Employees should carefully review their contracts and seek legal advice if needed to understand their severance entitlements.

Seeking Legal Guidance for Severance Evaluation

Consulting with an employment lawyer can provide valuable insights into severance pay entitlements. A lawyer can review the specifics of an employee’s situation, including their contract and employment history, to provide guidance on the expected severance amount and potential negotiation strategies.

Conclusion

Understanding severance pay laws in Ontario is crucial for both employees and employers. By knowing your rights and obligations, you can better navigate the complexities of employment termination. Whether you’re calculating severance pay or determining eligibility, this guide provides a foundational understanding to help you make informed decisions.

Empowering Employees and Employers

Knowledge of severance pay laws empowers both employees and employers. Employees can ensure they receive fair compensation, while employers can fulfill their legal obligations and maintain positive relationships with former employees. Empowerment through knowledge leads to more informed and equitable outcomes.

Navigating the Complexities of Employment Termination

Employment termination is a complex process with significant financial and emotional implications. Understanding severance pay laws is a critical component of navigating this process, providing clarity and confidence during challenging times.

Making Informed Decisions in Employment Transitions

Armed with a comprehensive understanding of severance pay laws, individuals can make informed decisions during employment transitions. Whether negotiating a severance package or understanding legal rights, this knowledge serves as a valuable tool for navigating the complexities of the employment landscape.

Contact us for your severance package discussions.