Employer Advice for Understanding the Rules Surrounding Ontario Severance Pay

If you’re letting someone go, employers should be aware that the employee may be entitled to compensation. “Severance pay” is paid to compensate for the losses of qualified employees who have had their employment “severed”.  Ontario’s Employment Standards Act (ESA) carefully outlines the rules and guidelines around what is owed and to whom.

Which employees are qualified for severance pay?

According to the ESA, only certain employees qualify to receive severance pay. Employees are only eligible for this form of compensation if:

• They have worked for the employer for five years or more; and
• The employer managed a minimum payroll of $2.5 million, or
• The employer has terminated 50 or more employees in a six month period due to the business permanently closing

Employers can sever an employee’s employment due to the company filing for bankruptcy, insolvency, or if they are permanently closing. Severance pay is not typically paid if the employee is terminated due to inappropriate conduct or has failed to meet job expectations.

When is an employee exempt from severance pay?

A qualified employee is not always entitled to severance pay. The ESA outlines exemptions to paying out. Exemptions can be complex, so it’s recommended that employers seek HR advice. An employee is not entitled to severance pay if they:

• Refuse an offer of “reasonable alternative employment” with the employer
• Had their employment severed and retire on a full pension
• Had their employment severed due to the business closing due to the economic effects of a strike
• Is guilty of willful misconduct, job abandonment, disobedience, or willful neglect of duty

For a complete list of exemptions please consult Ontario’s Labor Law.

How is severance pay calculated in Ontario?

Severance pay in Ontario is calculated using a simple formula. An employer should multiply the employee’s regular wages for a typical workweek by the sum of the number of years the employee has served plus the number of months divided by 12 for partial years. If you need help calculating severance pay or determining if an employee is eligible for this type of compensation, contact us at 1 (833) 247-3652.