The Definition Of Severance Pay

severance pay definition

Severance Pay Meaning

Severance pay definition: Severance pay is defined as the money an employee gets when they are terminated from their employment without cause. In Ontario, there are two kinds of severance pay:

  1. Employment Standards Act severance; and
  2. Common law severance.

Common law severance is also known as “reasonable notice”.

Employees in Ontario are defacto entitled to common law severance unless they have a contract that specifically says all they get is Employment Standards Act severance.

Some employees may have a termination clause in their contract that provides a formula for calculating severance equal to or greater than the Employment Standards Act in case of termination.

To be clear, employees must have a contract specifying they get Employment Standards Act severance only in case their employer wants to pay them Employment Standards Act severance only instead of common law severance.

The Employment Standards Act is government legislation ensuring minimum standards for employees, such as minimum wage, overtime pay, holiday pay and severance.

Thus, Employment Standards Act severance is a floor. It is the minimum amount of severance the Ontario government says an employer must pay.

On the contrary, Common law severance is a ceiling. It is the maximum amount of severance that judges say an employer must pay. Common law means judge-made law.

Common law severance by definition is worth much more than Employment Standards Act severance.

Employment Standards Act Severance Definition

The meaning of severance according to the Employment Standards Act is compensation that must be paid to a qualified employee who has their employment terminated. To qualify for Employment Standards severance, an employee must work at an employer with a (i) $2.5-million-dollar payroll (ii) for five years or more. Thus, small businesses usually don’t have to pay Employment Standards Act severance.

Employment Standards Act Severance Meaning

Employment Standards Act severance is easy to calculate. It is a simple formula. Employee who qualify for Employment Standards Act severance get 1 week of pay for every year of service. For example, if Jim worked at an auto dealership for 16 years, he would get 16 week’s Employment Standards Act severance.

Employment Standards Act Notice / Termination Pay Definition

In addition to Employment Standards Act severance, employees in Ontario are entitled to Employment Standards Act notice or Employment Standards Act termination pay.

An employer can provide Employment Standards Act working notice or Employment Standards Act termination pay in lieu of working notice. Most employers in Ontario provide termination pay, not notice. But it is their choice.

Employment Standards Act Notice / Termination Pay Meaning

To qualify for Employment Standards Act notice or termination pay, the employee needs to have only worked 90 days. There is no payroll requirement like severance – all employers in Ontario must provide Employment Standards Act notice or Employment Standards Act termination pay. Employment Standards Act notice or termination pay is easy to calculate. Like Employment Standards Act severance, it is a simple formula. Employees who qualify for Employment Standards Act notice or termination pay get 1 week of notice or termination pay for every year of service. For example, if Jane worked at a small restaurant for two years, she would get 2 weeks’ Employment Standards Act notice. Jane would not be entitled to Employment Standards Act severance because she did not work 5 or more years and her employer did not have a 2.5 million dollar payroll.  

Thus, some employees in Ontario qualify for both:

  • Employment Standards Act severance (1 week per year of service) and
  • Employment Standards Act notice or termination pay (1 week per year of service).

Employment Standards Act Severance / Notice Chart

Employment Standards Act severance1 weeks’ pay per year of service26 weeks maximum
Employment Standards Act notice 1 week per year of service8 weeks maximum

Employment Standards Act Example Severance and Notice

For example, James worked at a large manufacturer for 7 years. James would be entitled to 7 weeks’ worth of Employment Standards Act severance and 7 weeks’ worth of Employment Standards Act notice or termination pay. In total, James would get a check for 14 weeks’ pay upon termination.

Common law Severance Definition

The meaning of Common law severance is all the compensation that must be paid to an employee to recover their damages for losing their job.

Every employee in Ontario works for their employer under a contract of employment. There doesn’t need to be a physical, written contract. All employment relationships have an implied contract in Ontario.

Moreover, all employment contracts in Ontario are implied to be of indefinite duration (i.e. never-ending).

When an employer terminates an employee, it has “breached” the employment contract. Therefore, the employer owes the employee “damages” for breach of the contract.

Damages are money that would put the person who did not breach the contract into the same position they would have been in had the other party not breached the contract.

Thus, the damages an employee gets for breach of contract is money to put him or her back into the same financial shape as if he or she had not been terminated.

Accordingly, Common law severance is money to put a terminated employee back into the same financial shape as if he or she had not been terminated. In other words, common law severance is a paycheck during the time the employee is unemployed.

Employees only get common law severance for a specific amount of time. Employees are not entitled to damages forever. The courts have held that the maximum common law severance is around 2 years.  

However, there is no formula to determine how long an employee gets severance for.

The courts have determined that employees should be paid severance for around the amount of time that it would take a reasonable person in the same shoes as the employee to find another comparable job. Judges calculate how long it will take someone to find another job by examining the terminated employee’s age, salary, years of service and position.

There is generally a minimum amount of common law severance all employees get. This is around 3 months because it takes anybody in any position at least that time to find a new job.

Common Law Severance Example

For example, a 24-year-old chef who worked for 3 months could be entitled to 4 months common law severance because that is how long it will probably take him or her to find a new job. On the contrary, a 30-year banking executive could be entitled to over two years severance because he or she may never find a comparable job again.

Check out our cool info-graphic on the average severance in Ontario. And click here to read more about how to calculate severance.

Severance Pay Definition

In summary, the definition of severance pay is money an employee gets when they are terminated. If the employee has a contract that limits him or her to Employment Standards Act severance only, then that is all he or she gets. However, if there is no termination clause in the employment contract limiting the employee, then he or she gets common law severance which is worth far more Employment Standards Act severance.

To be clear, employees who are entitled to common law severance do not get Employment Standards Act severance. It is one or the other.

If an employer does not provide enough severance, then the employee has been “wrongfully dismissed” and he or she can hire a lawyer to sue for more.

Only a lawyer has the power to enforce common law severance for someone. The Ontario government, through the Ministry of Labour, only enforces Employment Standards Act severance.

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