Navigating the Maze: Understanding Severance Pay in Ontario

Severance pay is one of the most misunderstood concepts among Ontario employers.

Severance pay is separate from, and in addition to, the notice or pay in lieu of notice that an employer must provide to its employees under the Employment Standards Act, 2000 (ESA).

The ESA sets out a minimum amount of severance pay that employers of a certain size must provide to eligible employees when they sever their relationship with an employee in Ontario.

For an employee to be entitled to severance pay, they must have worked for the employer for at least five years and the employer must have an annual payroll of $2.5 million or more.[1]

How much severance is paid?

An eligible employee is entitled to one week of regular wages per completed year of employment, plus 1/12 of a week’s regular wages for each additional completed month of employment.

For example, an employee who worked for a company for eight years and six months would be entitled to 8.5 weeks’ severance pay.

What is a severance event?

Employers often think of severance pay as something they have to pay when they directly terminate someone’s employment. But in fact, there are 5 distinct situations where an employee will be considered severed under the ESA and entitled to severance pay:

1. the employee is given notice of termination or otherwise dismissed by the employer or the employer refuses or is unable to continue employing the employee;
2. the employer constructively dismisses the employee and the employee resigns within from their employment in response within a reasonable period;
3. the employer lays off the employee for 35 weeks or more in a period of 52 consecutive weeks;
4. the employer lays the employee off because of a permanent discontinuance of all of the employer’s business at an establishment; or
5. the employer gives the employee proper notice of termination and the employee subsequently resigns, with at least two weeks written notice, and the employee’s notice of resignation takes effect during the statutory notice period.

What payroll is considered?

If a severance event has occurred, the next most common question employers ask is how they determine if their payroll is at or above the $2.5 million threshold required under the ESA.

The ESA says that an employer will be above the threshold if:

1. the total wages earned by all employees in the 4 weeks prior to the severance date, when multiplied by 13 (not 12), equals $2.5 million or more; or
2. the total wages earned by all employees in the employer’s last or second last fiscal year prior to the severance was $2.5 million or more.

Recent case law[2] has clarified that the $2.5 million threshold considers an employer’s global payroll, not just its payroll across Ontario or Canada.

So, even if a company only has a single employee in Ontario, if its global payroll is $2.5 million or more, it will be required to pay that employee both termination pay and severance pay if it severs their employment (assuming the employee has worked there for at least 5 years).

All periods of employment considered

Employers often overlook employees’ previous periods of employment when determining if they are entitled to severance. The ESA requires employers to consider all periods of employment, whether continuous or not, in determining whether an employee is entitled to receive severance.

An employee who worked for the company for 4.5 years, left for 10, then came back for just 6 months, would be entitled to receive severance pay because they had worked for the company for a total of 5 years.

Calculation where terminated without notice

Often, employees are terminated with pay in lieu of notice. When that happens, employers often erroneously calculate the severance payment from the date the employee was provided notice of termination.

Doing that does not conform with the requirements of the ESA. Rather, employees are entitled to receive a severance payment as if they had worked to the end of the minimum notice period required under the ESA.

For example, if you terminate an employee with 8 years and 2 weeks of service, they would be entitled to 8 weeks of termination notice or pay in lieu of notice. Their severance would be calculated as if they had worked for 8 years and 10 weeks. Hence, their severance would be calculated as if they had worked for 8 years and two full months. So they would receive a severance payment equal to 8.16667 weeks of their normal pay.

Severance to be paid in a lump sum unless agreed otherwise

The ESA generally requires severance payments to be provided in a lump sum.

If the employee agrees, the payment may be provided in installments paid over a period of less than three years. But if the employer fails to provide even one payment on time, all remaining severance pay becomes immediately payable. So it’s important for employers to ensure that installment payments are paid on time. Severance payments can be confusing for employers and employees alike. If you have questions or concerns about whether an employee is entitled to severance pay or if it was calculated properly, please reach out to one of the employment lawyers at our office who can help you make this determination.

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[1] Additionally, employers with a payroll less than $2.5 million will be required to pay severance pay if the severance occurs because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have had their employment relationship severed within a six month period.

[2] Hawkes v. Max Aicher (North America) Limited, 2021 ONSC 4290 (CanLII), https://canlii.ca/t/jgfnn