Employment Law: Severance Pay in Ontario

“Severance pay” is one of the most misunderstood topics in Ontario employment law. In practice, the term is used in two different ways: (1) to describe a statutory entitlement under Ontario’s Employment Standards Act, 2000 (the ESA), and (2) as a shorthand for the overall termination package an employer offers when ending employment. The difference matters, because not every employee is entitled to statutory severance pay, and a termination offer that meets ESA minimums may still fall short of common law entitlements.

This page explains how severance pay works in Ontario and the issues that often arise when an employee’s employment is terminated.

What “Severance Pay” Means in Ontario

(a) ESA Severance Pay (a specific statutory payment)
ESA severance pay is a standalone statutory entitlement that may be owed to eligible employees in addition to ESA termination notice (or pay in lieu) and benefit continuation.

(b) “Severance” as a termination package (common usage)
Employers often use “severance” to describe a package that can include:

• ESA termination pay or working notice
• ESA severance pay (if applicable)
• Additional amounts offered in exchange for a release
• Treatment of benefits, bonuses, commissions, and other compensation items

Because the same word is used for different concepts, careful review of the offer and the employee’s legal entitlements is often required.

ESA Termination Pay vs. ESA Severance Pay

Ontario law may require one or both of the following:

• Termination notice or termination pay (ESA): the minimum notice/pay an employer must provide when terminating without cause, based primarily on length of service.
• Severance pay (ESA): an additional statutory payment that applies only where specific eligibility requirements are met.

An employee can be entitled to termination pay but not severance pay, or to both.

Who Is Eligible for ESA Severance Pay?

ESA severance pay is not automatic. Eligibility generally depends on statutory criteria that include:

• Length of service: the employee must meet the ESA’s minimum service threshold; and
• Employer size/circumstances: the employer must meet the ESA’s requirements relating to employer payroll size and/or the termination occurring in circumstances captured by the ESA severance provisions.

Eligibility can be contentious where there are corporate group structures, asset sales, changes in payroll, or disputes about what counts toward service.

How ESA Severance Pay Is Calculated (General Approach)

ESA severance pay is calculated using an employee’s regular wages and length of service, subject to ESA rules and any applicable caps. Disputes often arise regarding:

• Whether “regular wages” should include commissions, incentive pay, overtime, or shift premiums
• How to treat variable pay where earnings fluctuate
• Whether the employee’s service is continuous in the event of a sale of business or related corporate changes

The calculation must also be distinguished from termination pay, which is calculated differently and is tied to the statutory notice period.

Common Law “Severance” (Reasonable Notice) and Why It Matters

If there is no enforceable agreement limiting entitlements to ESA minimums, a terminated employee may be entitled to common law reasonable notice, which frequently exceeds ESA minimums.

Common law reasonable notice is assessed on a case-by-case basis and may consider factors such as:

• Length of service
• Age
• Position and responsibilities
• Availability of comparable employment

In this context, “severance” often refers to the amount paid to cover the reasonable notice period, which may include more than base salary.

Employment Contracts and Termination Clauses

A well-drafted employment contract may limit termination entitlements to ESA minimums. However, Ontario courts scrutinize termination clauses closely. A clause may be found unenforceable where it:

• Provides less than ESA minimum standards (or could do so in some circumstances)
• Is ambiguous or inconsistent
• Improperly limits benefit continuation during the statutory notice period
• Uses “for cause” language that attempts to remove ESA minimums in situations where the ESA would still require payment

If a termination clause is unenforceable, the employee may be entitled to common law reasonable notice rather than ESA minimums only.

What Should a Termination Package Address?

A legally compliant and commercially reasonable termination package often addresses more than base salary, including:

• Benefits: continuation of coverage (or compensation for loss of coverage) during the applicable notice period
• Bonuses and incentives: whether the employee remains eligible during the notice period and how entitlement is calculated
• Commissions: treatment of pipeline sales, post-termination commission rules, and plan wording
• Vacation pay: amounts accrued and owing
• Pension and RRSP contributions: whether contributions continue during the notice period or are paid out in another form
• Releases: whether additional compensation is offered in exchange for a release of claims

Bonus and incentive compensation frequently become the most significant area of disagreement, particularly for senior employees.

Mitigation and Re-Employment

In common law notice claims, employees generally have a duty to mitigate by seeking comparable employment. Earnings during the notice period may reduce damages depending on the circumstances. This is separate from ESA entitlements, which are not typically reduced by mitigation.

Timing and Documentation

Severance disputes often turn on the documents and communications surrounding termination, including:

• The written termination letter and package terms
• Whether the employer requested a signed release
• Whether deadlines were imposed and how negotiations were handled
• The employment agreement, bonus plans, commission plans, and policy manuals

In many cases, the enforceability of the employer’s position depends on the exact wording of these documents.

Conclusion

In Ontario, “severance pay” can mean statutory ESA severance, a broader termination package, or both. Determining what is legally owed requires an assessment of ESA minimum entitlements, potential common law reasonable notice, the enforceability of any termination clause, and how compensation elements—benefits, bonuses, commissions, and allowances—should be treated on termination.

This information is provided for general informational purposes only and does not constitute legal advice. Reading this page does not create a solicitor-client relationship. Outcomes depend on the specific facts and applicable law.