What is the Difference Between “Termination Pay” and “Severance Pay” in Ontario?
Termination pay vs severance pay is a common question we receive. It is no surprise that we receive so many questions about the difference between termination pay and severance pay as there appear to be a lot of misconceptions out there.
The confusion likely comes from the fact that termination pay and severance pay can mean different things under two different contexts:
When we speak about “statutory” rights when someone is fired, “termination pay” means the one week of pay for every year of service (up to eight) that most employees are entitled to. At the same time, again, when we speak about “statutory” rights when someone is fired, “severance pay” means that one week of extra pay for every year of service (up to 26 weeks) for all those rarer employees employed for at least five years with an employer with a payroll above $2.5 million.
“Statutory” means government-made law, i.e. legislation. In Ontario, the statutory legislation that covers termination and severance pay is called the Employment Standards Act.
However, when we speak about “common law” rights, termination pay and severance pay mean the same thing: that money an employee gets in lieu of “reasonable notice” of the termination of their employment.
“Common law” means judge-made law. Common law is continuously evolving. It is a living tree. Every time a judge makes a written judgment, it becomes common law.
Common law “reasonable notice” (a.k.a. common law termination pay/severance pay) is worth far more than statutory termination/severance pay. The Ministry of Labour can enforce statutory termination/severance pay but only the courts can enforce common law termination pay/severance pay. Most employees should seek common law reasonable notice, not statutory termination pay/severance pay. Statutory termination pay/severance pay is just a floor. Common law reasonable notice is a ceiling.
Statutory Termination and Severance Pay in Ontario
The termination provisions in Part XV of the Employment Standards Act provide that most employees must be given a minimum amount of advance warning of the termination of their employment or pay in lieu of notice called “termination pay”.
The severance pay provisions in Part XV of the Employment Standards Act provide that long-standing employees must be given special compensation called “severance pay” in recognition of their long service when their employment is terminated.
The employer’s obligations under the termination pay and severance pay provisions of the Employment Standards Act are entirely separate and distinct from each other, and one cannot be used to offset the other.
Statutory termination pay and severance pay amounts are predetermined. Unlike the common law, there can be no argument by the employee or the employer to extend or decrease statutory amounts, respectively. Refer to the next two sections for the formula for calculating statutory termination and severance pay.
Calculating Statutory Termination Pay
To calculate the amount of statutory termination pay an employee is entitled to receive, multiply the employee’s regular wages for a regular workweek by the sum of the number of completed years of employment. Note: The maximum amount of statutory termination pay an employee is entitled to receive under the Employment Standards Act is 8 weeks’ pay.
Calculating Statutory Severance Pay
To calculate the amount of statutory severance pay an employee is entitled to receive, multiply the employee’s regular wages for a regular workweek by the sum of the number of completed years of employment; and the number of completed months of employment divided by 12 for a year that is not completed. The maximum amount of severance pay required to be paid under the Employment Standards Act is 26 weeks’ pay.
Calculating Common Law Termination and Severance Pay in Ontario
Remember, common law termination pay and severance are the same thing. They both mean the same thing: common law reasonable notice.
Unlike statutory termination pay and severance pay, common law reasonable notice (i.e. common law termination or severance pay) is not predetermined, and there is much fluctuation in every case. There is no formula or chart to refer to. Each case is different, and calculating reasonable notice is an art, not a science.
The decision of Bardal v. Globe & Mail Ltd., 1960 CanLII 294 (ON SC) (“Bardal”) remains the touchstone for calculating reasonable notice. In that case, the Chief Justice stated, at paragrpah 21:
There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.The Bardal Factors
The employee in Bardal was the director of advertising of the Globe and Mail and a member of the board of directors. He had been with the company for 17 years. He was awarded one years’ severance. That award would be considered very modest by today’s standards.
In applying the Bardal factors to a particular case, “the reasonableness of the reasonable notice must be decided with reference to each particular case …” Thus, the weight to be given to one factor depends on its relative importance in the overall context and its relationship to the other factors including “the availability of similar employment, having regard to the experience, training and qualifications of the servant”.
The duty of a court in applying the Bardal factors is to determine whether the specific severance given by the employer was reasonable in all the circumstances and, if not, to determine what notice or compensation in lieu should have been given.
With respect to the factor of character of employment, there appears to be a presumption that employees with more senior positions in an organization, such as those with management responsibilities, require a longer notice period than those with lower levels of responsibility. It is presumed that there are fewer employment opportunities available for those whose specialized knowledge and skills demand higher managerial positions with comparable salaries and benefits: Minott v. O’Shanter Development Company Ltd. (1999), 1999 CanLII 3686 (ON CA).
While length of service must not be given undue prominence, and should not be allowed to overshadow the other factors, there is no doubt that length of service has traditionally been a very import factor in determining the period of notice.
With respect to the factor of age, there is a general presumption that, after a certain age, it becomes progressively more difficult for an employee to obtain new employment: see Trudeau-Linley v. Plummer Memorial Public Hospital (1993), 1 C.C.E.L. (2d) 114 (Ont. Gen. Div.).
The availability of similar employment, having regard to the experience, training and qualifications of the servant is a question that must be asked prospectively, as opposed to retrospectively. The determination of reasonable notice must be made based on the circumstances prevailing at the time of dismissal, and not judged by the length of time it has taken the employee to find employment: Harper v. Bank of Montreal (1989), 27 C.C.E.L. 54 (Ont. Div. Ct.).
There is a general proposition, expressed by Glithero J. in Orlando v. Essroc Canada Inc., that “long-term employment within a narrow field has the effect of leaving the employee in a less marketable position when searching for replacement employment”.
After taking into consideration all the above-noted Bardal Factors, in a lawsuit for more reasonable notice, both the employee and the employer’s lawyers present what they consider are comparable cases as guides to the appropriate amount of reasonable notice in their case. In the result, a judge makes a determination based on the Bardal factors and comparable cases to award a specific amount of reasonable notice to an employee.
The above is the difference between termination pay and severance pay in Ontario (and Canada, generally).
Keep in mind that common law reasonable notice is usually worth far more than statutory termination/severance, and, therefore, most people should not worry about the difference between statutory termination pay and severance pay because they want common law reasonable notice instead.
Key Point: You cannot get both common law reasonable notice and statutory termination pay/severance. If someone is awarded statutory termination pay/severance by their employer and they later sue for common law reasonable notice, their statutory termination pay/severance award will be subtracted. Think of statutory termination pay/severance pay as minimum “reasonable notice”.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.