Losing a job can be stressful, especially when you are unsure about the compensation you should receive after your employment ends. Severance pay is one of the payments that may be available to eligible employees, but the rules can be confusing because Canada does not have one single severance formula for every worker. Entitlements can depend on the province or territory, the type of employment, length of service, employment contract, and applicable employment standards legislation.
Understanding how severance works can help employees review an employer’s offer and determine whether the amount appears reasonable. It is also important to understand that statutory severance pay and common-law reasonable notice are not necessarily the same thing.
What Is Severance Pay?
Severance pay is compensation provided to certain employees when their employment relationship ends. It is intended, depending on the applicable legislation, to recognize factors such as long service and the loss of employment-related benefits or seniority.
One of the most important points for employees is that severance pay is not always the same as termination pay. Termination pay generally represents wages that would have been earned during a required notice period when an employer does not provide working notice. Severance pay is a separate entitlement in jurisdictions where the applicable employment standards legislation provides for it.
For example, Ontario treats termination pay and statutory severance pay as separate requirements. An eligible employee may receive both.
Does Every Canadian Employee Receive Severance Pay?
No. Eligibility depends on the employment standards legislation that applies to the worker.
Canada has both federal and provincial employment standards regimes. Employees working in federally regulated industries may fall under the Canada Labour Code, while many other employees are covered by provincial or territorial legislation.
For example, under Ontario’s Employment Standards Act, an employee generally needs at least five years of employment and the employer must meet additional requirements, such as having a global payroll of at least $2.5 million or having permanently closed an establishment and terminated at least 50 employees within a six-month period.
Federal rules are different. Under the Canada Labour Code, an employee who has completed at least 12 consecutive months of continuous employment may be entitled to statutory severance when the employment is terminated for qualifying reasons. The federal formula is generally the greater of two days’ wages for each completed year of employment or five days’ wages.
This illustrates why employees should not assume that a formula found online automatically applies to their situation.
How Is Statutory Severance Calculated?
The calculation depends on the jurisdiction.
In Ontario, for employees who qualify, statutory severance is calculated using the employee’s regular wages for a regular work week multiplied by the employee’s completed years of employment, plus the completed months of an incomplete year divided by 12. The statutory maximum is 26 weeks.
For example, imagine an eligible Ontario employee earns $1,200 in regular weekly wages and has completed 8 years and 6 months of employment.
The calculation would be:
$1,200 × (8 + 6/12) = $10,200
The result represents the statutory severance amount under the Ontario formula, assuming the employee meets all eligibility requirements and no special rule or exemption applies.
Other jurisdictions can use different formulas, so employees should first identify which employment standards rules govern their employment.
What About Federally Regulated Employees?
Employees covered by federal labour standards should use the Canada Labour Code rather than a provincial formula.
For qualifying federally regulated employees with at least 12 consecutive months of continuous employment, statutory severance is generally the greater of:
- Two days’ wages at the regular rate for every completed year of employment; or
- Five days’ wages at the regular rate.
Federal statutory severance is also separate from required notice or wages in lieu of notice.This distinction can make a significant difference when calculating the total amount owed when employment ends.
Severance Pay vs. Reasonable Notice
Another major issue is the difference between statutory minimum entitlements and common-law rights.
Employment standards legislation generally establishes minimum requirements. Depending on the circumstances, an employee may have a contractual or common-law right to more than the statutory minimum.
Reasonable notice can consider factors such as the employee’s position, length of service, age, compensation, and the availability of comparable employment. The amount is not determined simply by multiplying years of service by a fixed number.
This is why an employer’s severance offer should not automatically be accepted simply because it meets the minimum employment standards requirements. In some situations, an employee may have greater rights outside the statutory minimum framework. Ontario’s government specifically notes that some employees may have greater rights under common law or other legislation.
Using a Severance Pay Calculator
A severance calculator can be useful as a starting point. Employees can enter information such as salary, length of employment, and other relevant details to obtain an estimate based on the assumptions used by the calculator.
For example, someone researching the Chapman Riebeek LLP severance pay tool may use it to get a preliminary understanding of potential severance calculations before reviewing an employment termination package.
However, an online calculator should be treated as an estimate rather than a final legal determination. Employment agreements, termination clauses, bonuses, commissions, benefits, vacation pay, and jurisdiction-specific rules can affect the amount an employee may ultimately be entitled to receive.
What Information Should Employees Gather?
Before evaluating a severance offer, employees should collect important employment documents. These may include:
- Employment or offer letters
- Employment contracts and amendments
- Recent pay statements
- Records of bonuses and commissions
- Benefits information
- Stock or equity compensation documents
- Records showing the employee’s start date
- Termination letters
- Any written severance offer
- Workplace policies referenced in the employment agreement
Having these documents together makes it easier to understand how an employer calculated the proposed payment and whether important forms of compensation have been overlooked.
Can Severance Include More Than Salary?
Potentially, yes. Depending on the circumstances and applicable law, an employee’s overall termination package may involve more than basic salary.
Benefits, vacation pay, bonuses, commissions, pension contributions, and other compensation may need to be considered when assessing an employee’s rights. The treatment of these items can vary significantly depending on the contract and applicable law.
Employees should therefore avoid looking only at the dollar amount of a severance cheque. A package that appears generous at first may have conditions or exclusions that affect its actual value.
What Should You Do Before Accepting a Severance Package?
Employees should carefully read the termination letter and any release they are asked to sign. A release may require the employee to give up certain legal claims in exchange for the offered payment.
If the package is significant, the employee has worked for the company for many years, or the termination clause in the employment contract is unclear, obtaining independent legal advice can be worthwhile.
It is also important not to assume that signing quickly is always necessary. Employees should understand what they are receiving and what rights they may be giving up before signing a release.
Final Thoughts
Calculating severance pay in Canada is not always as simple as multiplying a salary by years of employment. The applicable jurisdiction, length of service, employment contract, statutory rules, and potential common-law rights can all influence an employee’s entitlement. Statutory severance may also be separate from termination pay or reasonable notice.
A calculator can provide a helpful starting estimate, but employees should examine the complete termination package and relevant employment documents before making a final decision. When significant amounts of money or legal rights are involved, professional legal advice can help ensure that an employee understands the full value of their potential entitlements.
