All About Severance (Ultimate Guide)

severance

What is severance?

Severance means the same thing as “notice”, or “termination pay” or “reasonable notice”, so when we speak about severance, know that we are also talking about “notice”, or “termination pay” or “reasonable notice”. Severance, or “notice”, or “termination pay” or “reasonable notice”, all mean this: the amount of pay an employer must provide to an employee terminated from their job.

What severance pay means?

Technically, in Ontario, there are two kinds of severance pay:

1.   Employment Standards Act severance; and

2.   Common law severance.

Employees in Ontario are implicitly entitled to common law severance unless they have a termination clause in an employment contract that says explicitly all they get is Employment Standards Act severance.

Severance Pay Meaning

Who is entitled to severance?

There is an implied obligation to give severance in every employment relationship in Ontario. As soon as an employment relationship begins, an implied unwritten contract is formed, and in that implied unwritten contract is a duty on the employer’s behalf to provide severance. Thus, to be clear, every employee is entitled to severance of some amount. 

Who is Entitled to Severance?

How much severance are you entitled to?

As discussed above, every employment contract has an implied obligation for the employer to provide the employee severance. But, an employer is free to pre-calculate how much severance an employee is entitled to. Termination clauses do this in employment contracts. 

A termination clause can provide some formula for severance. For example, a termination clause could say that a terminated employee is entitled to 1 month of severance after every year of completed service. Usually, lower-level employees have a termination clause that provides a small amount of severance, while executives have a termination clause that provides a large amount of severance.

Check your contract for a termination clause to see how much severance you would be entitled to. 

For example, James worked for Acme Inc., a marketing agency, for 18 years. James had a termination clause that said he gets 2 weeks’ severance for every year of service in case of termination. In this regard, upon termination, James would be entitled to 36 weeks severance. 

What is minimum severance? 

The Ontario Employment Standards Act does have a floor that says employers must not make a termination clause that provides severance lower than a certain amount. If a termination clause is written in such a way that goes below the Employment Standards Act minimum, then it is void. 

Employers must not make termination clauses that provide less than this much severance as per the Employment Standards Act

Amount of notice (or pay in lieu) required if an employee has been continuously employed for at least three months
Period of employmentPay required
Less than 1 year1 week
8 years or more8 weeks (maximum)

PLUS

Amount of extra severance pay required if an employee has been continuously employed for at least five years and the employer has a 2.5 million dollar payroll.
Period of employmentExtra Pay required
1 year1 week
….
26 years26 weeks (maximum)

In summary, at minimum, all employees in Ontario with 3 months service should be paid 1 weeks’ severance (or 1 weeks’ working notice) per year of service (up to a maximum of 8 weeks’), and all employees with five or more years of service at large employers (2.5 million dollar payroll) should be given an additional 1 weeks’ severance per year of service (up to a maximum of 26 weeks). For example, if Jenny worked at Widget Co., a multinational manufacturing company, for 40 years, she would be entitled a minimum severance amount of 34 weeks. If she had a contract that had a termination clause that provided for anything less than 34 weeks’ severance, then it would be void. 

If there is no termination clause, or if the termination clause is void, then the implied obligation for the employer to provide the employee severance is calculated based on the “common law”. This is key. If an employee has no termination clause or if the termination clause is void, the employee does not want minimum severance because the common law gives them greater rights than minimum severance under the Employment Standards Act.

How do you calculate common law severance pay? 

There are four main factors relevant to the determination of common law severance:

  1. Character of the employment;
  2. Length of service;
  3. Age of the employee; and
  4. Availability of similar employment.

These factors must be applied on a case-by-case basis, and no one factor should be given disproportionate weight. Other considerations in calculating the appropriate severance amount include whether the employee was induced from other employment. Note there are hundreds of potential other severance factors. Talk to an employment lawyer to learn about the other severance factors that may apply in your case. 

What is a Wrongful Dismissal?

Essentially, we take all the above factors and compare them to past “wrongful dismissal” cases where somebody sued for more severance to learn that, for example, in cases where somebody:

  1. Was an engineer;
  2. Worked for 20 years;
  3. Was 50 years old; and
  4. And has difficulty finding new work

Then we know that he or she would be entitled to around 18-24 months severance. We know this because we can read multiple old cases in Canada where someone in the same circumstances as the above example employee received anywhere from 18-24-months severance from the judge. There may be a 2 cases where someone got 18 months, and 4 cases where somebody received 24 months, and it’s the employee’s lawyer’s job to argue his or her client’s case is more similar to the 24-month case then the 18-month cases. On the contrary, it is the employer’s lawyers’ job to argue that the other side’s case is more similar to the 18-month severance cases. 

How to Calculate Severance

How do I counteroffer a severance package?

Nevertheless, many times, there does not need to a be severance lawsuit where the parties can amicably negotiate the common law severance amount owed. For example, using the same facts as above, the parties might agree that the appropriate common law severance range is about 18-24 months severance. Therefore they both meet halfway and agree to a 21-month severance amount. Typically, this is what happens when someone hires a lawyer for more severance. In these cases, it is not difficult to come to a mutual agreement because both sides’ lawyers can see from the past case law that 18-24 months is the range of severance, and anything more or less than this amount is not realistic. Hence, settlement in the middle is ideal. Sometimes, however, you get one party who erroneously argues the severance amount, one way or the other, is well beyond the range of cases set out in the past cases, and a (losing) severance lawsuit is inevitable.

Read this article from Monster.ca for more on what to do with your severance offer.  

What is the maximum severance? 

The maximum severance is about 24 months, except in exceptional circumstances. Exceptional circumstances which may entitle an employee to more than 24 months include unusually lengthy seniority, very old age, the fact an employee has spent his or her entire working career with one employer, and if an employee was a high-powered manager or executive. In exceptional circumstances, someone might be able to get 26-28 months’ maximum severance, but generally no more.

Maximum Severance

How much severance pay am I entitled to in Ontario?

Check your contract for a termination clause that might have a formula for how much severance you should get. Otherwise, if there is no termination clause (or if you think the termination clause might be void), call us, and we will calculate your severance from past cases in a free consultation. 

Average Severance Pay in Ontario

Can I get employment insurance if I got a severance?

Yes, you can get employment insurance (“EI”) if you get severance, except you cannot start to receive EI funds until your severance is expired. Do apply quickly for EI though. Read more here

Is it better to be fired or to quit?

If you want severance, it is better to be fired than it is to quit. If you quit, unless it a constructive dismissal, you do not get severance. 

How do I request a severance package?

This is sort of awkward. You cannot really request a severance package. You must be fired, not voluntarily quit to get a severance package unless it a constructive dismissal. Call us for a free consultation in regard to approaching your company for a severance package. This is a tricky situation best handled by a lawyer with experience.

What can you do if you were unfairly fired?

If you were unfairly fired, your only recourse, generally, is severance. The law does not protect your job; it only protects your right to severance. However, if you were fired for discriminatory reasons, or while you were on job-protected leave, then, perhaps, you could be entitled to human rights damages and job-reinstatement.

Note that your employer does not even need to give you a reason when they terminate you with severance. To be clear, employers need not have any reason to fire you, but they must provide severance. That is the extent of the law. The only caveat to this is when you are fired without severance for just cause. In these rare cases, an employer must provide a reason justifying your summary dismissal.

Should I sign severance? 

You should call a lawyer before you sign a severance. Most employment lawyers will offer a free consultation, advising on the range of severance that you should be entitled to in a quick call. If you learn your severance offer is in the range of reasonableness, then you may be inclined to sign the severance package. 

Do not sign the severance package if you know you want to ask for more severance. Once you sign the severance package, you are barred from claiming more severance. Read more here.

Do I need a lawyer to negotiate severance?

A lawyer will help you negotiate more severance. A lawyer can credibly threaten a lawsuit, so a lawyers’ demand carries more weight than a non-lawyers’ demand. If an employer receives a demand letter from an employee, not a lawyer, then the employer may not believe the employee will actually follow up with a lawsuit if they couldn’t even find a lawyer even at this early and inexpensive stage. Thus, the employer will be less likely to settle if the employee does not hire a lawyer. However, there are always exceptions, and some people have successfully negotiated their severance on their own.

Is it better to take a lump-sum severance?

Yes, it is better to receive a lump sum severance than a salary continuance. What if the employer goes out of business in the middle of your severance period? We learned during the COVID times that anything is possible. 

Generally, the only plus to a lump sum severance is, perhaps, potential tax savings, which is not something lawyers should be advising on, so we won’t comment on that. Speak to your accountant before making the decision to take a lump sum or not. 

Contact Dutton Employment Law to review your severance rights today in a free consultation. We are an employment law group focusing on severance packages. We are located in downtown Toronto, but we serve all of Ontario.