This article on severance pay in Ontario will cover the following themes:
Severance pay is a form of compensation paid to a non-unionized employee when their employment relationship is severed without cause.
ESA Severance provides your absolute minimum legal entitlement to severance pay. Eligible employers are obligated to pay this amount. If they fail to do so, then you can file a claim with the Ministry of Labour. We do not recommend this in most cases.
Common law severance is a misnomer. The public commonly uses severance pay to describe all forms of pay when the employment relationship is severed. What you actually want is legally referred to as common law reasonable notice or pay in lieu of notice. Common law reasonable notice is typically significantly higher than ESA severance.
A well drafted employment agreement can limit your severance pay to that which is in the contract. It must as a minimum be unequivocally clear and provide you equal to or greater than the minimums provided by ESA severance. You cannot contract for less than ESA severance.
It depends on what type of severance pay you are referring to.
ESA Severance Pay
ESA severance pay requires a severing of the employment relationship which is defined in section 63(1) of the ESA as follows:
“(a) the employer dismisses the employee or otherwise refuses or is unable to continue employing the employee;
(b) the employer constructively dismisses the employee and the employee resigns from his or her employment in response within a reasonable period;
(c) the employer lays the employee off for 35 weeks or more in any period of 52 consecutive weeks;
(d) the employer lays the employee off because of a permanent discontinuance of all of the employer’s business at an establishment; or
(e) the employer gives the employee notice of termination in accordance with section 57 or 58, the employee gives the employer written notice at least two weeks before resigning and the employee’s notice of resignation is to take effect during the statutory notice period.”
The following additional requirements exist to qualify for ESA Severance:
AND
OR
Common Law Severance
Most employees who have not contracted out of common law severance have an entitlement to it. Additionally, dependent contractors are entitled to common law severance.
Contractual Severance
Employees who have a termination clause limiting their severance rights are entitled to what is provided in the termination clause if it provides equal to or greater than the amounts provided by the ESA. It is important to note that many termination clauses are invalid. If the termination clause is void or invalid, then the employee will have the right to common law severance.
The answer to this question depends on which type of severance you are seeking. If you are seeking your very minimum entitlements, then that will be provided by ESA severance. If you have not signed a contract that effectively limits your severance rights, then you can seek common law severance pay which is almost always significantly more.
You cannot seek both common law severance and ESA severance. The ESA makes this clear at section 97(2) which reads as follows:
“An employee who files a complaint under this Act alleging an entitlement to termination pay or severance pay may not commence a civil proceeding for wrongful dismissal if the complaint and the proceeding would relate to the same termination or severance of employment.”
If you seek termination pay or severance pay under the ESA you have 2 weeks to withdraw your claim. If you fail to do so you will not have the right to pursue common law severance. This is made clear in section 97(4) of the ESA.
ESA Severance and common law severance are calculated differently. The ESA provides a simple mathematic formula while the common law relies on weighing several factors to make a subjective calculation.
Step 1: The first requirement is to determine what your wages are in a regular work week. For most employees this is a simple task.
If the employee does not have a regular work week or is paid on a basis aside from time, then you average the regular wages of the employee in the past 12 weeks worked.
Step 2: Determine how long you have worked for your employer. This includes the years plus the months completed in the current year. The months completed in the current year should be divided by 12. As an example, an employee who has worked 5 years and 6 full months will equal 5 + (6/12) = 5.5 years.
Step 3: Multiply your wages for your work week from step 1 by the length of your employment that you calculated in step 2.
Note: ESA severance is a maximum of 26 weeks.
If you need help calculating ESA severance you can contact the Ministry of Labour. In most cases I recommend not seeking ESA severance as your common law severance rights will be significantly more.
Example 1: Joe has worked at ZYX Kitchens for 17 years and 8 months. His wages in a regular work week are $875. ZYX Kitchens Inc has an Ontario payroll over $2.5 million.
The severance pay example calculation is as follows:
(17 + (8/12)) x $875 = $15,458.33
Example 2: Bob worked at ZZZ Consulting for 4 years and 10 months. Bob is not entitled to ESA severance pay because he has not worked at least 5 years with ZZZ Consulting.
Example 3: Lorie has worked for 34 years with ZYX Services. They have a payroll of over $2.5 million in Ontario. Lorie is entitled to the ESA maximum severance pay of 26 weeks.
Example 4: Larry has worked for 12 years and 3 months with QQQ Consulting. This is a small business which does not have a payroll of over $2.5 million and Larry is one of five employees dismissed in the past 6 months. In this severance pay example Larry is not entitled to severance pay as the employer does not have a payroll over $2.5 million and has not dismissed a minimum of 50 employees due to a closure of part of the business in the past 6 months.
The four primary factors that go into determining how much common law severance you are entitled to are as follows:
There is no scientific method to calculating common law severance. Judges and lawyers balance these factors and try to make a best guess as to what your common law entitlements will be. Luckily for all parties there is significant case law in place which can provide precedents and assistance in determining what your common law severance entitlements in Ontario are.
If you seek common law severance you are making a claim for wrongful dismissal. See our guide on wrongful dismissal for more information.
ESA severance is to be paid out by the later of your next regular pay day and 7 days after termination. Employers can seek different terms of payments by making a request in writing to the Director of Employment Standards at the Ministry of Labour or by agreeing in writing with the employee.
The ESA additionally provides that the period in which severance pay can be paid in installments where agreed to with the employee or with the authority of the Director of Employment Standards cannot exceed 3 years.
If an employer fails to make an installment payment, then the entire amount remaining becomes due.
In most cases common law severance is paid out when the matter settles with terms agreed upon between both parties. In the rare case that the matter goes to trial the common law severance would be paid based on the Judge’s decision, an agreement between the parties or upon a collection process.
Generally, in Ontario all forms of compensation are to be included in a severance package. This includes benefits, bonuses, car allowances, commissions, wages etc. It should be noted that an employer with a carefully drafted contract may be able to restrict what compensation is included. This is particularly useful for bonuses which can make up a significant portion of some employee’s income.
ESA severance by contrast is not intended to cover all forms of compensation.
The ESA provides for a maximum of 26 weeks severance pay. This would be provided to an employee who has been employed with a company for 26 years or more.
Historically common law has capped severance at 104 weeks. (2 years) However, in recent years Judges have provided over 2 years severance in some cases.
In Lowndes v. Summit Ford Sales Ltd., 2006 CanLII 14 (ON CA) at paragraph 11 Justice Cronk wrote:
“Although it is true that reasonable notice of employment termination must be determined on a case-specific basis and there is no absolute upper limit or ‘cap’ on what constitutes reasonable notice, generally only exceptional circumstances will support a base notice period in excess of 24 months”
The court of Appeal in Lowndes determined that 28 months was the applicable notice period. This decision and reasoning was followed in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79 where Justice Gillese made it clear at paragraph 31 that exceptional circumstances may permit a notice period in excess of 24 months.
“I agree that the trial judge failed to expressly make a finding of exceptional circumstances. I note that as part of the agreed statement of facts, the parties presented an agreed damages calculation that included figures for up to 26 months of notice. This may explain why there is no explicit finding of exceptional circumstances as it clearly indicates that an award beyond 24 months was in the contemplation of all parties. In any event, however, given the Keenans’ ages and lengths of service, and the character of the positions that they held, I would not interfere with the award.”
The Court of Appeal in Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512 at paragraph 32 also cites Lowndes and Keenan as representing the law in terms of maximum common law severance.
“This court has followed the Lowndes approach over the years. The Lowndes approach was endorsed in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79, 29 C.C.E.L. (4th) 33, at para. 30. In Keenan, the court declined to set aside an award of 26 months’ notice, finding that the plaintiffs, who were husband and wife, had established exceptional circumstances, based on their ages at the time of termination (63 and 61 years old), their lengthy service (32 and 25 years), and the character of the positions they held.”
All of these cases make it clear that where exceptional circumstances are present a court can award over 24 months severance pay in Ontario.
At common law it will depend on what has occurred. If you have settled the matter without any claw back provision, then it should not stop because you found another job.
If the matter has not been settled and you begin working again then it will likely reduce the amount which a Judge will award you at Court. This is because you will have to some degree mitigated your losses.
Judges have a few ways of dealing with this issue. Sometimes the money is held in Trust and released in stages. Other times an employee may have to pay back some amount of money if they get a new job prior to the end of the reasonable notice period awarded.
If your business has less than 50 employees and a payroll less than $2.5 million you do not typically have to pay ESA severance. However, if you do not have a signed contract with a valid termination clause limiting the employee’s severance pay then you will likely be liable for wrongful dismissal unless the employee signs away their rights.
Often severance pay and termination pay are used interchangeably. However, they are not the same thing. ESA severance pay is only available to employees with 5 or more years service and is designed to reward long standing employees. By contrast, termination pay is available to all employees who are employed at least 3 months by their employer.
Being entitled to severance pay does not preclude you from being entitled to termination pay. If you are entitled to severance pay it will be in addition to termination pay.
The ESA termination pay provides the bare minimum of your termination pay rights. It is as follows:
|
Time Employed |
Weeks of Wages to be Paid as Termination Pay |
|
3 months – 1 year less a day |
1 |
|
1 year – 3 years less a day |
2 |
|
3 years – 4 years less a day |
3 |
|
4 years – 5 years less a day |
4 |
|
5 years – 6 years less a day |
5 |
|
6 years – 7 years less a day |
6 |
|
7 years – 8 years less a day |
7 |
|
8 years or more |
8 |
The cap on ESA termination pay is 8 weeks. An employee of over 26 years would therefore be entitled to 8 weeks termination pay plus 26 weeks severance pay under the ESA. However, under common law many employees who have been employed for such a significant duration of time will be entitled to 12-24 months pay.
Income from severance pay is generally classified as a retiring allowance in Ontario. This income is taxable and subject to the following withholding rates:
This article on severance pay from the CRA may be useful.
Some of the amount you receive from your employer may be eligible for RRSP contributions.
One of the techniques that may be available in your specific case is classifying damages as punitive damages or damages for human rights violations. These damages are generally not taxable.
Additionally, it may be useful to have severance payments made in separate years to stay in a lower tax bracket.
My speciality / knowledge is not on taxation. As a result, I strongly recommend you seek out tax advice from a qualified accountant.
A valid termination clause can restrict or prevent an employee’s right to claim for common law severance.
Under the ESA the employment relationship is not severed by a layoff unless it exceeds specific time periods. By contrast, at common law layoffs have been treated as grounds for constructive dismissal if there is no implied or express term in the employment contract. This historically has allowed employees to common law severance pay if they choose to unilaterally terminate the employment relationship due to a layoff.
A new regulation in relation to coronavirus layoffs has recently been put in place. The new regulation may have an affect on common law constructive dismissal claims related to coronavirus layoffs. I would advise you to look at our articles on “Coronavirus Layoffs” and “Temporary Layoffs Ontario” for more information on layoffs.