Severance payment is a crucial aspect of employment law that protects workers who are let go from their jobs, especially in cases of termination without cause. It acts as a financial cushion, helping former employees transition as they search for new employment. Understanding how severance pay works and how it is calculated is vital for both employees and employers in Ontario and across Canada.
Whether you’re an employee facing termination or an employer planning a layoff, it’s important to be well-informed about severance entitlements and the laws governing them.
What is Severance Payment?
Severance payment is a form of compensation provided to employees when their employment ends under certain conditions. It is different from regular wages or bonuses and is usually paid when an employee is terminated without cause, meaning the employer has decided to end the working relationship for business reasons (such as downsizing, restructuring, or closing operations) rather than because of employee misconduct.
Severance is meant to:
- Recognize long-term service
- Provide income support while the employee searches for new work
- Compensate for the sudden loss of employment
This payment can include more than just base salary—it often factors in commissions, bonuses, benefits, and other forms of compensation depending on the circumstances.
Severance Pay vs Termination Pay
It’s common to confuse severance pay with termination pay, but they are not the same.
- Termination Pay: This is provided in place of the notice period when an employer ends employment immediately without notice. In Ontario, employees are generally entitled to one week of notice (or pay) per year of service, up to a maximum of eight weeks under the Employment Standards Act (ESA).
- Severance Pay: This is additional compensation for long-service employees who meet specific legal criteria. It recognizes the long-term investment an employee has made in the business.
Some employees may be entitled to both termination and severance pay, depending on their situation.
Who is Eligible for Severance Pay?
In Ontario, under the Employment Standards Act (ESA), severance pay is owed when:
- The employee has worked for the employer for five or more years, and
- The employer has a payroll of at least $2.5 million in Ontario, or
- The termination is part of a mass layoff affecting 50 or more employees in a short timeframe.
If both conditions are met, the employer must pay severance according to the formula in the ESA.
Common Law Severance vs ESA Severance
While the ESA outlines minimum standards, the common law often entitles employees to greater compensation. Common law severance is determined by the courts and considers a broader range of factors, including:
- Length of service
- Age of the employee
- Position or job level
- Availability of comparable employment
In many cases, common law severance awards can be several months’ salary—far above ESA minimums.
How is Severance Payment Calculated?
1. Under the Employment Standards Act (ESA)
Severance pay under the ESA is calculated using the following formula:
Severance Pay = Regular Wages × (Years of Service + Months of Service ÷ 12)
Employees are entitled to one week of regular pay for each year of service, with pro-rated amounts for incomplete years, up to a maximum of 26 weeks.
Example:
If an employee has worked for 7 years and 6 months, and their weekly wage is $1,000, then:
Severance Pay = $1,000 × (7 + 6/12) = $1,000 × 7.5 = $7,500
This amount is in addition to any termination pay or vacation pay owed.
2. Under Common Law
There is no fixed formula for common law severance. Instead, it is based on legal precedents and varies widely depending on individual circumstances.
For example, a senior executive who worked for 15 years may receive 12 to 24 months’ pay under common law, while an entry-level employee may receive less.
Because this calculation is complex, many people use an Ontario severance calculator as a starting point. These tools estimate the range of compensation based on criteria like age, tenure, and role—but always consult with an employment lawyer to understand your full rights.
What Does Severance Pay Include?
Severance pay can be made as:
- A lump sum payment
- Salary continuance (ongoing payments over time)
- Combination of both
It may also include:
- Benefits continuation (e.g., health, dental, insurance)
- Bonus and commission entitlements
- Pension contributions
- Outplacement services or support for finding a new job
In many cases, employers offer severance packages that go beyond the legal minimums to avoid litigation or to maintain goodwill with former employees.
Severance Payment for Part-Time, Contract, or Temporary Workers
Contrary to popular belief, part-time and temporary employees may still be entitled to severance pay under the ESA or common law, depending on the length and consistency of their service. Contract workers may also be eligible if they were effectively treated as permanent employees.
Employment status alone does not determine entitlement—what matters is the length and nature of the working relationship.
Can You Refuse a Severance Package?
Yes, employees have the right to refuse a severance package if they believe it’s inadequate. Many severance offers come with a release clause, meaning the employee agrees not to take legal action in exchange for the payment.
Before signing anything, it’s essential to:
- Understand your full entitlements
- Compare the offer with ESA and common law standards
- Seek legal advice
A professional review can help you determine whether the offer is fair or whether negotiation is necessary.
Severance and Wrongful Dismissal
If you’re let go and not provided with sufficient severance pay or notice, you may have a case for wrongful dismissal. This occurs when an employer fails to provide adequate compensation after terminating an employee without cause.
In such cases, courts often award common law severance—significantly higher than ESA minimums.
Final Thoughts
Severance pay is not just a legal requirement—it’s a recognition of the employee’s time and contributions to a company. Understanding the laws around severance payments in Ontario helps ensure that you receive fair compensation when your job ends.
From eligibility criteria to calculation methods under the ESA and common law, knowing what you’re entitled to can help you make informed decisions during a difficult transition.
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