What is Severance Pay?

What is Severance Pay in Ontario?

The term “severance pay” in Ontario is often used as a catch-all phrase encompassing three distinct components: termination pay, severance pay, and payment in lieu of notice. These terms are sometimes used interchangeably but refer to different legal entitlements. Termination pay is compensation for the lack of notice, severance pay is an additional payment for long-term employees, and payment in lieu of notice covers the notice period when an employee is let go immediately. Understanding these distinctions is key to ensuring fair compensation upon termination.

Despite their distinct legal meanings, these terms are frequently conflated under “severance pay,” leading to misunderstandings about employees’ entitlements. The following is a summary of Ontario’s three significant components of termination pay.

Statutory Termination Pay under the Employment Standards Act

In Ontario, termination pay is a statutory entitlement under the Employment Standards Act, 2000 (ESA). It is designed to provide employees with a minimum level of compensation when their employment is terminated without cause. The specifics of termination pay are outlined in Ontario Regulation 288/01 under the ESA.

According to Section 57 of the ESA, an employee continuously employed for three months or more is entitled to termination pay if the employer terminates their employment without cause. The termination pay is calculated based on the employee’s length of service. As per Section 60 of the ESA, an employee is entitled to one week’s pay for each completed year of service, with a minimum of one week and a maximum of eight weeks’ pay.

For example, an employee who has worked for the same employer for five years would be entitled to five weeks’ termination pay. The weekly pay is calculated by taking the employee’s regular wages for a regular work week, as outlined in Section 60(1) of the ESA.

Termination pay is payable immediately upon termination as a lump sum payment. According to Section 11(5) of Ontario Regulation 288/01, the employer must pay termination pay no later than seven days after the employee’s employment is terminated or on the employee’s next regular pay date, whichever is later.

However, not all employees are entitled to termination pay. As per Section 2 of Ontario Regulation 288/01, certain categories of employees are excluded from the termination pay provisions. These include, but are not limited to:

1. Employees who have been employed for less than three months;
2. Employees who are terminated due to willful misconduct, disobedience, or willful neglect of duty;
3. Employees who refuse an offer of reasonable alternative employment with the employer;
4. Construction employees;
5. Employees on temporary layoff; and
6. Employees who have lost their jobs due to a strike or lock-out.

It is important to note that termination pay under the ESA is a minimum standard. Some employees may be entitled to additional compensation based on their employment contract or common law principles. Employers and employees should always refer to the specific provisions of the ESA and its regulations to determine their rights and obligations regarding termination pay in Ontario.

Statutory Severance Pay under the Employment Standards Act

Certain but not all employees are entitled to severance pay in Ontario, distinct from termination pay or common law reasonable notice. Severance pay is an additional payment under the Employment Standards Act, 2000 (ESA). It compensates long-term employees for losses related to the termination of employment, recognizing their service and contribution to the employer over time.

Eligibility for Severance Pay

Not every employee is entitled to statutory severance pay. The ESA outlines specific criteria that must be met:

Employer Size:

• The employer must have a payroll of at least $2.5 million in Ontario or
• The employee must have been terminated as part of a mass layoff involving 50 or more employees within six months.

Length of Service:

• The employee must have worked for the employer for at least five years. This includes both full-time and part-time employees as long as they have reached the five-year threshold.

When is Severance Pay Required?

Severance pay is required when an eligible employee is terminated without cause. It may also be owed when an employee resigns in response to constructive dismissal (where the employer makes significant changes to the terms of employment without the employee’s consent, effectively forcing them to quit).

How is Severance Pay Calculated?

The calculation of severance pay under the ESA is formulaic:

• Formula: Severance pay equals one week of regular wages for each year of employment plus a pro-rated amount for any partial year of service.
• For example, if an employee has been with the company for ten years and six months, they would be entitled to 10.5 weeks of severance pay.
• Regular Wages: Regular wages refer to the employee’s average earnings, excluding bonuses, overtime pay, and benefits.

Let’s consider an employee who has worked for an employer for 12 years and earns $1,000 per week in regular wages. The calculation would be:

• 12 years of service x 1 week of wages per year = 12 weeks of severance pay
• 12 weeks x $1,000 per week = $12,000 in severance pay

This payment is in addition to any termination pay or pay in lieu of notice that the employee may be entitled to receive.

Statutory severance pay under the ESA is a crucial protection for long-serving employees, particularly in large organizations or during mass layoffs. It ensures that these employees receive fair compensation for their years of service and helps to cushion the financial impact of losing their jobs. Employers must carefully assess their obligations under the ESA to avoid potential legal liabilities, and employees should be aware of their rights to ensure they receive the severance pay they are entitled to under the law.

What is Common Law Reasonable Notice?

Where there is no contractual term to the contrary, an employer who dismisses an indefinite-term employee without just cause is obliged to provide the employee with reasonable notice of the termination of their employment. The reasonable notice period includes the minimum statutory termination notice period and the period of time covered by statutory severance pay.

How is Reasonable Notice Calculated?

There are two steps to determine an employer’s potential liability for reasonable notice.

First, we must determine the “period” of reasonable notice – which is determined by referencing something called the “Bardal Factors” in all jurisdictions but Quebec, where the reasonable notice factors are articulated in the Civil Code of Quebec.

The Bardal factors are a set of considerations used by courts in Ontario (and across Canada) to determine the appropriate amount of reasonable notice or severance that an employee is entitled to upon termination without cause. These factors originate from the seminal case Bardal v. The Globe & Mail Ltd., decided in 1960, which established that determining reasonable notice depends on a variety of factors rather than a fixed formula.

What are the Key Bardal Factors?

The Character of Employment: The nature and responsibilities of the employee’s position play a crucial role. Senior or managerial roles often warrant longer notice periods, as they may be harder to replace, and the employee might face more difficulty finding comparable employment.

The Length of Service: Generally, the longer an employee has been with the company, the longer the notice period should be. Long-term employees are typically awarded more significant notice periods due to their extended loyalty and the challenge of finding new employment after many years in a stable job.

The Age of the Employee: Older employees may be entitled to longer notice periods. The rationale is that older individuals might face more challenges in the job market, such as age discrimination or a lack of available positions suited to their experience level.

The Availability of Similar Employment: The court considers how easy or difficult it will be for the employee to find a comparable job. Factors like the employee’s skill set, the state of the job market, and geographic location can impact this assessment. If similar employment is scarce, a longer notice period may be warranted.

The court weighs these factors in each case to determine what constitutes reasonable notice. The Bardal factors are not applied rigidly; instead, they provide a framework for considering the unique circumstances of each termination. The goal is to ensure that the employee receives a fair amount of notice, reflecting the challenges they will face in transitioning to new employment.

The second step in determining the employer’s potential liability is calculating the employee’s damages over the reasonable notice period. To determine the financial value of the employee’s loss, we then:

• determine the sources of the employee’s compensation, including salary, bonus, commissions, overtime, group insurance benefits, stock options, pension benefits, RRSPs, automobile benefits, fringe benefits, etc;
• determine whether there are contractual limits on those sources of compensation post-termination;
• valuate the different methods of damage calculation for each portion of the employee’s compensation;
• break down the employee’s compensation and benefits to a monthly or weekly figure and multiply this value by the months or weeks of reasonable notice.

The court will award an amount that most accurately reflects what the employee would have earned over the applicable notice period. For more information about calculating the employee’s potential damages over the reasonable notice period,

Lost Job? Call our Hamilton Employment Lawyers Today.

Losing your job can be challenging and uncertain, especially when understanding your rights and entitlements under Ontario law. Whether dealing with termination pay, severance pay, or navigating the complexities of common law reasonable notice, ensuring you receive everything you’re entitled to is crucial. Our Hamilton Employment Lawyers can provide the guidance and support you need to secure the best possible outcome. Don’t face this difficult situation alone — contact us today to discuss your case and take the first step toward resolving your employment concerns.

Please don’t hesitate to call us, no matter where you are in Ontario, at 1-844-LALANDE or locally in the Southern Ontario region at 905-333-8888. Alternatively, you can send us a confidential email through our website – and we’ll set up a meeting to explain your employment law rights and legal options at no cost.