What is Severance Pay and When is it Owed to the Employee by the Employer?

Mar 15, 2022

When an employer wishes to terminate employment, the employee is entitled to notice or pay in lieu, and severance pay in certain instances. Depending upon various scenarios, the total severance package may vary considerably.

Severance pay in Ontario applies if an employee has five (5) or more years of service and the employer has a payroll of 2.5 million or more or 50 or more employees are being laid off within 6 months. Severance pay is calculated by an employee’s weekly earnings multiplied by the number of years the employee has served, plus the number of months divided by 12 for partial years.

If you have recently been dismissed, you may be entitled to severance pay. “Severance” is often misunderstood or used interchangeably with “notice” or “termination pay”.  Below, we will discuss what each of these terms means and how they may impact you.

Severance of employment occurs in the following instances: 

  • An employee is dismissed
  • An employer stops employing the employee, such as through bankruptcy or insolvency
  • An employee is constructively dismissed
  • An employee is laid off for more than 35 weeks in any period of 52 consecutive weeks
  • An employee is laid off due to business closure
  • In certain circumstances, if an employee resigns after being provided working notice

Employee entitlements on dismissal in Ontario are divided into two categories: statutory and common law entitlements.

Statutory Entitlements    

Under the Ontario Employment Standards Act, 2000 (ESA), employees may be entitled to statutory notice, termination pay and/or severance pay. 

Most employees with three months or more tenure will be entitled to statutory notice, which is generally calculated as one week per year of service, up to a total of 8 weeks.  This may be offered as either working notice or termination pay.

Statutory severance pay compensates dismissed employees for the losses associated with the dismissal, such as the loss of seniority. Severance pay is not available to all employees and will depend on your tenure, the size of the employer and/or the number of employees dismissed at the time. Statutory severance is generally calculated as one week per year of service up to a total of 26 weeks.

Common-Law Entitlements

While the statutory requirements mentioned above are the minimum entitlements, most employees will also be entitled to a much longer period of notice. Unless a valid employment contract restricts their entitlements, employees will also be entitled to common law notice.  This notice will be based on the employees’ age, tenure, nature of employment, and the availability of similar employment. 

Many employment contracts may attempt to restrict employee entitlements on dismissal, but will often be unenforceable.  It is important that employees have an experienced employment lawyer review any severance package offered to ensure that they are fully informed of their rights and entitlements.

Whitten & Lublin’s legal team can 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.

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