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Termination Pay in Ontario (FAQ)

What is termination pay?

Termination pay in Ontario is money awarded to an employee by their employer for loss of employment. The amount of termination pay awarded is the amount of income which the employee would have earned from his employer during the period of required “reasonable notice”. The amount owed as termination pay is based on the “common law” not statutory minimums.

Termination pay is just another word for “common law severance” or “reasonable notice”. They are all the same thing. Thus, termination pay is not deducted from severance pay, which is a question we sometimes get asked. However, you cannot get common law severance / termination pay / reasonable notice and statutory minimum notice and statutory minimum severance. Statutory notice and statutory severance is just a floor – it is the minimum amount of notice and severance employers have to give employees. Nevertheless, employees shouldn’t want statutory notice or severance, they should want common law severance (also called termination pay, reasonable notice, etc.), which is the ceiling and therefore worth far more than statutory entitlements. Think of it this way: employees who make $50 dollars an hour do not get statutory minimum wage too. The statutory minimum is only there to prevent employers from paying anything less.

What is reasonable notice?

At common law, an employee is entitled to, in the absence of express agreement in a termination clause in an employment contract, “notice” of the loss of the job that is “reasonable in all the circumstances because such notice is an implied term of the employment relationship.

In layman’s terms, reasonable notice is the amount of time, or “notice”, an employer must give an employee in warning them they are losing their job. An employer can give working notice for the job loss for some number of weeks or months, or it can provide “termination pay” immediately in lieu of such working notice in the form of a payment of any number of weeks or months’ pay that the employee would have earned had the employer provided a working notice period.

Can the employer provide me working notice or termination pay?

The employer has the choice to provide working notice or termination pay in lieu of working notice. Usually, employers provide termination pay though.

Does an employer have to give a reason for termination?

An employer does not need to provide a reason for termination. All the employer has to provide is reasonable notice. In Ontario your job is not protected, only your right to notice of termination is protected. On the other hand, an employer does have to give a reason for termination in case the employer is terminating the employee for just cause, in which case the employer does not need to give the employee any notice. However, just cause is difficult it prove. An employer must show the employee is guilty of serious misconduct that has not been condoned in the past.  

Is everyone entitled to termination pay?

Generally, everyone in Ontario is entitled to termination pay regardless of how long they worked or the size of their employer. This is because, as discussed above, most Canadian employees are entitled to “reasonable notice”. Termination pay is essentially pay in lieu of reasonable notice.  

Are you entitled to termination pay when fired?

Call us to determine if you are entitled to termination pay. We will review your employment contract to see if there a termination clause ousting your right to reasonable notice. If you do not have an employment contract, then you are entitled to reasonable notice by default. If you are entitled to reasonable notice, we will advise over the phone how much termination pay you may be entitled to. Otherwise, continue reading below for a short discussion on calculating termination pay in Ontario or read this long post.

Are employers required to give termination pay?

Employers are required to give termination pay (or working notice) to their employees regardless of the amount of time worked or how large the employer is. The one exception to paying any termination pay is if the employer and employee have agreed to a valid and enforceable probationary clause in the employment contract which provides for no termination pay in the first three months of employment, and the employee is terminated in those first three months. Alternatively, as discussed above in this paragraph, an employer does not need to provide termination pay if the employer provided reasonable “working notice”.

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

Common law termination pay is the termination pay we are talking about in this blog post, which is, again, pay in lieu of reasonable notice. Unlike common law termination pay (where there is no formula), minimum statutory termination pay uses a formula according to statutory legislation called the Employment Standards Act. The minimum statutory formula for termination pay in Ontario is as follows: one week of termination pay per year of service up to a maximum of 8 weeks. In addition, some employees in Ontario with 5 years or more years of tenure at big company are entitled to statutory severance pay, which is a formula as follows: one week of statutory severance per year of service up to a maximum of 26 weeks.

Conversely, common law termination pay 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 or rule of thumb. Common law termination pay is far more lucrative than minimum statutory termination pay.

However, in most circumstances, only a lawyer can negotiate or sue to achieve maximum common law termination pay. The Ministry of Labour cannot get an employee common law termination pay.  The Ministry of Labour can only get an employee minimum statutory termination pay and severance pay.

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

What is the difference between termination pay and severance pay?

Practically, under the common law, there is no difference between termination pay and severance pay. They mean the same thing. You don’t get both. They are synonyms of each other. When someone speaks about termination pay, they are speaking about severance pay.

However, technically, there is a difference between termination pay and severance pay in Ontario only.  As discussed above, as a bare minimum, an employee in Ontario is entitled to both minimum statutory termination pay, and minimum statutory severance pay in some circumstances. However, minimum standards do not apply in most cases because smart employees know they want common law termination pay or severance pay (which is the same thing), not minimum standards termination or severance pay. Thus, in conclusion, there is no difference between common law severance pay and common law termination pay, but there is a difference between statutory severance pay and statutory termination pay. Nevertheless, in most circumstances when you are hiring a lawyer, you will only be concerned with common law termination pay which is the same thing as common law severance pay.

How do you calculate termination pay?

Calculating common law termination pay 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 termination pay in Ontario are these:

  • Employee’s age at termination;
  • Employee’s length of service; 
  • Employee’s salary;
  • Employee’s character of employment; and 
  • The availability of similar employment with regard to the employee’s experience, training and qualifications.

Even still, there are many more criteria used to calculate termination pay in Ontario. Termination pay 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 in calculating termination pay in Ontario. For example, if an employee was disabled with an illness at the time of termination, he will be entitled to additional termination pay because it will take him that much longer to find comparable employment. Some other criteria include, for example:

  • if the employee was solicited away from stable employment to work for the employer before the termination;
  • if the employer made grand promises to the employee about secure, stable employment at the interview and in promotion meetings;
  • if the employee has a non-competition clause; and
  • if the employee worked in a remote community where there are few comparable employment opportunities.

As there are endless potential factors going into the calculation of common law termination pay, it is no wonder that no two cases are the same.

How much termination pay is normal?

There is no normal amount of termination pay. No two cases are the same. The one-month of termination per year of service rule is not true (although this does happen in some cases). Some employees may be entitled to more than 12 months of termination pay after just one year of service. Likewise, in rarer cases, some employees may only be entitled to less than one month of termination pay per year of service. This is especially true if the employee was young, and had a low-level job, and was paid a small salary.

However, all employees’ regardless if they worked only one hour before they were terminated must be provided around at least two months’ termination pay in most cases. The courts recognize that it will take everyone (regardless of their factors) at least that long for them to find comparable work. Even if you cook french fries at a fast-food restaurant, it will take a month or two to find another restaurant to work at. Conversely, an aerospace engineering manager working in the far noth will probably take a year to find a new job.

There is however a relatively normal amount of termination pay for older, long-standing employees. Older, long-standing employees are usually entitled to around twenty-four months’ termination pay. Indeed, around twenty-four months’ termination pay is usually the maximum unless there are exceptional circumstances in play.

Does anything I did at work affect my termination package?

No, the only thing that is relevant to determining how much termination pay you get is how long it is going to take you to find a new job. Whether you were a good employee or a bad employee does not matter in calculating termination pay. All that matters in a wrongful dismissal case is your damages, which is the period of notice you are entitled to.

Do I get my commissions, bonus or benefits as termination pay?

A reasonable termination package must include all the income you would have earned had you worked the reasonable notice period. Accordingly, unless your employment contract says otherwise, your termination pay must encompass your salary, all benefits and any bonus or commission you would have earned up to the end of the notice period. Think of it this way: if you get an 8-month termination package, you must be paid all the salary and bonus and commissions you expected to earn the next eight months, plus your benefits must be continued during that period.

Can termination pay be paid over time as a salary continuance?

The employer has the right to pay termination pay over time as a salary continuance as usual over the reasonable notice period or as a lump sum. It is the employer’s choice.

Can you work while collecting termination pay?

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

Can the employer put a clawback provision in the termination package?

Yes, an employer is allowed to have a clause in the termination package that claws back any income the employee might earn during the period of reasonable notice. This is perfectly legal because it follows the law of mitigation, which is this: if the employee sued for more severance, but she found a job before the judgment was rendered, the court would deduct (i.e. clawback) some of the termination pay it awarded the employee. Think of it this way: if you get into a car accident and break your arm, and you sue, but the arm heals in two weeks, you will get less damages than you would have gotten if your arm never healed.

Not all income earned during the reasonable notice period is deducted as mitigation. Only comparable income is deducted. For example, income earned out of necessity at a way worse job may not be clawed back. Nonetheless, a savvy employment lawyer may be able to negotiate the removal of the clawback from the termination package.

Can you negotiate a termination agreement?

In our experience, all termination 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 move to some degree. After all, it is often more economic 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 termination pay, then it will have to pay the employee’s legal fees. Accordingly, in a wildly agreed upon figure, around 90% of all cases settle out of court for some increased amount of termination once a lawyer gets involved.

What if my employer did not provide enough termination pay?

Call our employment law firm to determine if you were provided a reasonable termination package. If we discover you were not offered enough termination pay, we will write a letter demanding more termination pay or we will sue for more termination pay. Remember, your employer does not decide what is reasonable termination pay, the court does. Thus, if you have a disagreement over termination pay, the solution is to sue or threaten to sue for wrongful dismissal. This isn’t controversial. It is simply a disagreement over how long the reasonable notice period should be in your case. It won’t be murder trial. It will be a simple discussion of the reasonable notice factors discussed above, and a comparison of reasonably analogous cases in finding how much termination pay you are truly owed.  

How long do I have to sign a termination agreement?

Deadlines in a proposed termination agreement are usually meaningless. An employee is owed what he is owed according to the common law, not what the employer says he is owed. Thus, if it’s a bad offer, the deadline should be ignored (or asked to be extended). 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 unless it is a good offer or because the employer discovers the employee has mitigated.

An employee actually has two years to sign a termination agreement. That is the amount of time an employee in Ontario must sue for wrongful dismissal according to the limitation period.  

Can I get termination pay and unemployment insurance (EI) at the same time?

Not really. Termination pay is the same thing as working for however long the reasonable notice period. In that regard, the employee is only entitled to EI after the reasonable notice period expires. Think of it this way: if your termination package is for 9 weeks, then you are really working nine weeks. Thus, you should only go on EI after the 9 weeks is over. If you go on EI during your reasonable notice period, you will have to pay EI back. But, your EI period will extend for how long it was that you paid them back. In any event, it is best to apply for EI as soon as you are let go and advise Service Canada of your termination package such that EI will start the second your reasonable notice period expires. If you negotiate more termination pay later, you will advise Service Canada and they will ask to be paid back that over payment, but your EI period will extend.

How much tax is deducted from termination pay?

Termination pay 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 termination package to be paid as a lump sum over two years to save on income taxes or as general damages which are not income and thus are not taxed (call us for more about this as it is quite complicated). We also advise our clients to dump as much of their termination pay as possible into an RRSP to avoid withholding taxes.

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