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Severance Pay Canada (FAQ)

Is everyone entitled to severance pay?

Generally, everyone in Canada (except construction workers) are entitled to severance pay regardless of how long they worked or how big their employer is. This is because all Canadian employees are entitled to common law severance, which provides a range of around two and half months’ severance up to thirty-six months’ severance depending on several factors.

The only time employees are not entitled to common law severance is if they have an employment contract which contains a termination clause that says they get some different kind of severance, such as “minimum statutory severance” only or some other formula contained in a termination clause.

Are you entitled to severance pay when fired?

Call us to determine if you are entitled to common law severance pay or minimum statutory severance pay or some other formula for severance. We will review your employment contract. If you do not have an employment contract, then you are entitled to common law severance per se. If you are entitled to common law severance, we will advise over the phone how much severance you are entitled to. Otherwise, continue reading below for a brief discussion on calculating severance pay.

Are employers required to give severance pay?

Yes, employers are required to give severance pay to their employees regardless of the amount of time worked or how big the company is etc. The only exception to paying any severance is if the employer and employee have agreed to a valid and enforceable probationary clause in the employment contract which provides for no severance in the first three months of employment, and the employee is terminated in those first three months.

What is the difference between common law severance pay and minimum statutory severance pay?

Unlike common law severance, minimum statutory severance uses a formula according to legislated employment standards. The formula in Ontario is as follows: one week of severance per year of service up to a maximum of 26 weeks.

Conversely, common law severance is, essentially, the pay an employer must give an employee to compensate him for the time it will reasonably take him to find comparable work. There is no formula. In this regard, common law severance is far more lucrative than minimum statutory severance. However, in most circumstances, only a lawyer can negotiate or sue to achieve maximum common law severance. The Ministry of Labour cannot get common law severance.  The Ministry of Labour can only get an employee minimum statutory severance.

The only time employees are not entitled to common law severance is if they have an employment contract that says they get some different kind of severance, such as minimum statutory severance only or some other formula contained in a termination clause (i.e. 3 weeks per year of service).

How do you calculate a severance package?

Calculating common law severance is an art, not a science. There is no formula and no two cases are the same. Nevertheless, the primary criteria used to examine how to calculate severance in Canada is the following:

  • Employee’s age at termination. The older an employee, the more severance he is entitled to.
  • Employee’s length of service. The longer an employee has worked for the same employer, the more severance he is entitled to.
  • Employee’s salary. The more salary an employee earned, the more severance he is entitled to.
  • Employee’s character of employment. The more senior the employee’s position, the more severance he is entitled to.
  • The availability of similar employment with regard to the employee’s experience, training and qualifications. The more niche the employee’s profession is, the more severance he is entitled.

Even still, there are potentially thousands of other criteria used to examine how to calculate severance pay in Canada. Severance is often referred to as the period it should reasonably take the terminated employee to find comparable employment. Accordingly, any factor that affects the amount of time it will take an employee to find comparable employment must be considered. For example, if an employee was pregnant at the time of termination, she will be entitled to additional severance because it will take her that much longer to find comparable employment. Some of the other oft used criteria include:

  • if the employee was induced or solicited away from stable employment to work for the employer;
  • if the employee was promised long term, secure employment;
  • if the employee is prevented from competing against the employer due to a non-competition clause;
  • if there is a downturn in the employee’s industry;
  • if the employee did not have a university education and she was trained on the job earning a series of promotions, but any new job at the same level would require university education.

Because there are thousands of potential factors going into the calculation of severance, it is no wonder that no two cases are the same. Click here to read more about calculating severance.

How much severance pay is normal?

There is no normal amount of severance pay. No two cases are the same. The one-month of severance per year of service rule is bogus. Some employees may be entitled to more than 12 months of severance after one year of service. Likewise, in rarer cases, some employees may only be entitled to less than one-month of severance per year of service.

However, all employees’ regardless if they worked only one hour before they were terminated must be provided around at least two and a half months’ severance. The courts recognize that it will take all people at least that long for them to find comparable work.

There is however a relatively normal amount of severance for older, long-standing employees. Older, long-standing employees are generally entitled to a minimum of twenty-four months’ severance. Nonetheless, recent case law suggests that some older employees with exceptionally lengthy years’ of service could be entitled to over 36 months’ severance.

Click here to view our infographic on average severance. Or read our guide to average severance pay for long-tenured managers and executives.

Can severance pay be paid over time?

The employer has the right to pay severance over time as usual or as a lump sum. It is the employer’s choice. However, in most cases, the employee’s lawyer will work to settle the appropriate method of payment of severance in favour of the employee. For instance, lawyers can negotiate tax-friendly solutions for the payment of severance such as requiring the employer to pay two lumps sums (one in the year of termination and the other the following year).

Can you work while collecting severance pay?

Yes, severance must be paid regardless of whether the employee is working again. However, working again could impact the amount of severance the employee is entitled to if the employee sues after they get a new job. If the employee has mitigated their damages by finding new comparable employment that pays about the same, their period of severance will be reduced somewhat by the court. Accordingly, in most cases, it is best to settle severance before the employee returns to work. In that case, working would have no impact on the severance signed settlement/judgment unless the release/judgement had a clawback provision.

Can you negotiate a severance agreement?

In our experience, all severance packages are negotiable. Even if the employer says at first they won’t negotiate, it is our experience that once a lawyer gets involved, the employer will capitulate to some degree. After all, it is often more economical for an employer to increase their offer somewhat rather than go to the expense of defending a wrongful dismissal lawsuit. At the same time, the employer knows that if the court awards the employee a penny more than what it offered the employee for severance, then it will have to pay the employee’s legal fees. Accordingly, in our experience, around 99% of all reasonable cases settle out of court for some increased amount of severance once a lawyer gets involved.

How long do I have to sign a severance agreement?

Deadlines in a proposed severance agreement are usually meaningless. An employee is owed what he is owed according to the law, not the employer. Thus, if it’s a bad offer, the deadline should be ignored. The employee won’t be accepting it anyway. Therefore, why should the employee rush to sign? At the same time, in our experience, employers usually never pull their original offer even long after the expiry of the deadline.

An employee actually has two years to sign a severance agreement. That is the amount of time an employee in Ontario must sue for wrongful dismissal according to the statute of limitations. Thus, in conclusion, if the employer offers a bad deal, the employee should ignore the deadline to sign the severance package and instead try and settle for some larger amount of severance within the next two years.

However, if the employer offers a good deal, the employee should not wait until after the expiry of the deadline to sign the severance package. An employer is permitted to pull the deal after the deadline. Therefore, if the employee is inclined to agree, it should act within the allotted timeframe to secure the offered severance package. Still though, if the employee suspects it was offered a good deal, he or she should still consider asking an employment lawyer if they agree. After all, what appears to be a good deal to an employee may be a terrible deal to a trained employment lawyer.

Can I get a severance package and unemployment insurance (EI)?

Not really. When an employee fills out their EI application online, they are asked if they got a severance package. If the employee already agreed to a severance package, they have to tell Service Canada how many weeks of severance they accepted. Accordingly, if the employee accepted for example 10 weeks severance, then Service Canada would only approve their EI claim to begin in 10 weeks instead of immediately.

However, if the employee has not yet agreed to a severance package, then they can start receiving EI immediately. That said, once the employee receives their severance package, they will have to pay back EI for the total amount of weeks they were already on EI versus the number of weeks the severance package was for. For instance, if an employee is on EI for 16 weeks, and they agree to a severance package for 40 weeks, then they will have to pay back EI for 16 weeks and then they will be prevented from getting EI cheques for the next 24 weeks. On the bright side, they will have a credit for 16 more weeks entitlement if they remain unemployed that long.

Finally, employees should apply for EI immediately after they are terminated regardless if they have been offered or even accepted a severance package. This is because there is a deadline to apply for EI that does not take into consideration whether someone is still negotiating a severance. If the employee does not apply within this deadline, they may be refused EI or their period of EI may be shortened. It is thus best to apply for EI immediately even if it means EI won’t be paid until after the agreed-upon severance period is over.

Is it better to quit or get fired?

Employees who quit are not entitled to severance pay in Canada unless they were constructively dismissed. Accordingly, in terms of money, it is better to get fired than to quit. In addition, employees who quit are not entitled to EI unless they were constructively dismissed. Only employees who are fired are entitled to EI.

How much tax is deducted from severance pay?

Severance pay in Canada is taxable just the same as wages and is subject to a withholding tax. Most lump-sum payments made by employers withhold 30% for income taxes. Employees may also have to pay additional income taxes when they file their taxes at the end of the year.

Employees can structure a severance package to be paid as a lump sum over two years to save on income taxes. We also advise our clients to dump as much of their severance as possible into an RRSP to avoid withholding taxes.

In addition, general damages, such as punitive damages or human rights damage are non-taxable. Therefore, in wrongful dismissal cases where bona fide punitive damages or human rights damages were alleged, the lawyers should structure the deal so that a percentage of the severance is paid as general damages.

Likewise, legal fees paid to a lawyer are not taxable and may be eligible for a tax credit.

It is best to speak to an accountant nonetheless to maximize tax savings or get an opinion on the allocation of monies in a severance settlement.