A person’s job represents something so fundamental to their day-to-day life and sense of purpose that if they are let go from their place of employment it naturally leaves them in a position of uncertainty about what lies ahead. The first step for most who have their employment terminated without cause is to assess the severance package that their employer has offered them.
Severance package assessments
Employment lawyers are able to assess a person’s severance package and determine whether it is fair through a few key steps. Firstly, the lawyer will look at the person’s written employment contract, if applicable, to determine if the contract states what that person is entitled to if they are let go. In reviewing the contract, lawyers will not only be looking to see if the contract specifies what the person is entitled to, but a good lawyer will also be able to determine if the language in the contract is legally enforceable.
If the person does not have a written employment contract, if the contract does not specify the person’s entitlements upon termination, or if the contract’s language is unenforceable our firm’s severance pay calculator can then be useful in assessing what sort of severance package a court could award someone. Courts use factors such as the person’s length of service with that employer, their current age and type of work that they performed to determine the appropriate severance package for that individual.Â
How do you calculate your severance pay?
Severance pay in Ontario is typically calculated based on length of service, age, position, and how long it might take to find reasonable alternative employment. These factors determine what a court may award you under common law, which often exceeds the minimums set by the Employment Standards Act (ESA).
If you have a written employment contract, it may attempt to limit your entitlements, but not all contracts are enforceable.
Our severance pay calculator uses some of these factors to give an individual an estimate on what their approximate severance package entitlements might look like. The individual can then obtain a more comprehensive and detailed assessment of their matter by speaking to an employment lawyer. Legal advice is still key to understanding what your employer truly owes you.
What are the rules around severance pay?
In Ontario, there are two layers of severance protection:
- Minimum entitlements under the ESA
- Full common law entitlements, which can be much higher
ESA severance pay applies to employees with 5 or more years of service if the employer has a payroll of at least $2.5 million or if 50 or more employees are terminated within a 6-month period.
Even if ESA severance does not apply, you may still have significant rights under common law, which is why a legal review to calculate severance pay can be so valuable.
How much tax is taken off severance pay in Canada?
Severance pay is considered taxable income in Canada. The tax rate depends on how the money is paid out:
- If paid as a lump sum, your employer must withhold a portion for taxes (usually 10 to 30 percent based on the amount).
- If paid as salary continuance, it is taxed like regular income.
You may be able to reduce the immediate tax burden by transferring severance into a registered retirement savings plan (RRSP), provided you have contribution room.Â
What is a typical severance package in Canada?
There is no one-size-fits-all severance package. While the ESA provides a basic floor, most employees are entitled to much more under common law.
A typical severance package can range from a few weeks to several months per year of service, depending on your role, age, and how difficult it will be to find similar work.
At Whitten & Lublin, we regularly see cases where the initial offer is only a fraction of what the law allows. Do not accept a package without knowing your full entitlement.
Do you pay CPP and EI on severance pay?
It depends on how the termination pay is structured:
- Lump-sum payments are not subject to Canada Pension Plan benefits contributions or Employment Insurance (EI) deductions. These payments are considered a retiring allowance, and only income tax is withheld.
- Salary continuance payments are treated like ongoing wages. They are subject to the usual deductions, including income tax, CPP contributions, and EI premiums, until the continuance ends.
This distinction can influence both your take-home pay and your eligibility for EI. For instance, if your severance is paid as salary continuance, EI benefits may not be available until after the continuance period ends.
It is important to understand the legal implications of how your severance is structured before you agree to an offer. At Whitten & Lublin, we focus on reviewing the legal terms of your package, helping you understand how the structure may affect your rights and what options you have moving forward.
How to negotiate severance pay?
Negotiating severance starts with knowing what you are legally entitled to. Many employees are offered less than what they should receive, especially if they do not have legal representation.
At Whitten & Lublin, we review your employment contract, assess your common law rights, and help you build a strategy to increase the offer. In most cases, severance packages are negotiable, but be sure to act quickly and avoid signing an offer under pressure.
Know Your Worth Before You Settle
If you have recently been let go and your employer fails to provide a fair severance agreement, it is important to understand what you are truly entitled to. Our severance pay calculator can help you estimate the amount of severance pay an employee qualifies for under the law. This is only a starting point, and legal advice is often needed to confirm whether the offer on the table reflects your full rights.
We at Whitten & Lublin are happy to provide insight and advice into your specific circumstances. If you are looking for employment lawyers and would like more information about what Whitten & Lublin can do for you, please contact us online or by phone at (416) 640-2667 today.
Author: Nasyr Asmi
