Under the Ontario Employment Standards Act, 2000 (the “ESA”), an employee who has been continuously employed for at least three months is generally entitled to written notice of termination, termination pay instead of notice, or a combination of the two.
The minimum statutory notice depends on the employee’s period of employment:
| Period of employment | Minimum ESA notice |
|---|---|
| At least 3 months but less than 1 year | 1 week |
| 1 year but less than 3 years | 2 weeks |
| 3 years but less than 4 years | 3 weeks |
| 4 years but less than 5 years | 4 weeks |
| 5 years but less than 6 years | 5 weeks |
| 6 years but less than 7 years | 6 weeks |
| 7 years but less than 8 years | 7 weeks |
| 8 years or more | 8 weeks |
These are the minimum statutory notice periods for an individual termination. An employer can generally provide working notice, termination pay instead of notice, or a combination of the two, provided the employee receives at least the amount required by the ESA.
There are separate rules for mass terminations. Where 50 or more employees are terminated at an employer’s establishment within a four-week period, the statutory notice requirements can be significantly greater.
What Is Termination Pay?
Termination pay is the amount an employer pays instead of providing the employee with the required statutory notice of termination.
For example, an employee with five years of employment is generally entitled to at least five weeks’ advanced notice of termination under the ESA (also known as “working notice”). If the employer does not require the employee to work through that notice period, termination pay may be provided instead.
Termination pay is generally based on the wages the employee would have earned during the applicable statutory notice period. Depending on the circumstances, vacation pay and other amounts may also form part of the employee’s statutory notice of termination or termination pay entitlements.
Termination pay is therefore different from what is commonly referred to as “severance.”
Statutory Severance Pay Is Different
Ontario’s statutory severance pay is a separate and additional entitlement from termination pay.
An employee may qualify for statutory severance pay if they have been employed for at least five years and their employer satisfies the ESA’s applicable eligibility requirements, such as if the employer has a payroll of at least $2.5M (typically if they employ 50+ workers). Statutory severance pay is generally calculated based on the employee’s completed years and months of employment, up to a maximum of 26 weeks’ pay.
Importantly, an eligible employee can be entitled to both termination pay and statutory severance pay.
The two payments serve different purposes under the ESA.
Other Amounts Owed When Employment Ends
An employer’s obligations do not necessarily end when the final salary payment is issued.
Depending on the circumstances, an employee may also be entitled to:
- outstanding wages;
- accrued and unpaid vacation pay;
- vacation pay on applicable termination pay;
- statutory severance pay, where applicable;
- continued participation in certain benefit plans during the statutory notice period; and
- amounts owing under an employment agreement, compensation plan or other applicable arrangement.
Vacation Pay
Employees are generally entitled to receive vacation pay that has accrued but has not yet been paid when employment ends.
This can be particularly important where an employee has accumulated vacation entitlement or where vacation pay is calculated as a percentage of wages.
Benefits Coverage
Benefits can represent a significant part of an employee’s overall compensation.
In most circumstances, an employer is required to extend benefits coverage over the statutory notice period, even if the employer provided termination pay instead of advanced notice of termination.
The treatment of benefits during a common law reasonable notice period can be different and may depend on the employment contract, benefit plan and circumstances of the dismissal.
For executives and highly compensated employees, the value of lost benefits, pension contributions and other compensation can be substantial.
Statutory Notice vs. Common Law Reasonable Notice
The most important distinction for many terminated employees is between ESA minimum notice and common law reasonable notice.
The ESA provides minimum employment standards. Unless an enforceable employment agreement limits an employee’s termination entitlement, the common law may provide a significantly greater entitlement.
Common law reasonable notice is not calculated using the one-to-eight-week ESA formula.
Instead, courts consider the circumstances of the particular employment relationship, including factors such as:
- the employee’s age;
- length of service;
- position and level of responsibility;
- compensation;
- specialized skills or qualifications; and
- the availability of comparable employment.
As a result, reasonable notice is often measured in months rather than weeks.
An employee with eight years of service, for example, has an ESA minimum notice entitlement of eight weeks. That does notnecessarily mean that eight weeks is the employee’s full legal entitlement. In that example, that would be the employee’s absolute minimum entitlements.
Depending on the employee’s circumstances and employment contract, the common law notice period could potentially be substantially longer. In recent cases, courts have awarded common law notice periods as high as 24-28 months. In one recent case, a terminated employee was awarded 33 months common law reasonable notice of dismissal, inclusive of the employee’s minimum ESA entitlements.
What About Bonuses, Commissions and Other Compensation?
Reasonable notice may extend beyond base salary.
Depending on the circumstances, a wrongful dismissal claim may include compensation for amounts the employee would have received during the reasonable notice period, including:
- bonuses;
- commissions;
- pension or retirement contributions;
- health and dental benefits;
- car allowances;
- stock options or equity compensation; and
- other forms of compensation.
The treatment of these amounts depends on the employment contract, compensation plan and the particular circumstances of the termination.
This can make the difference between statutory minimums and common law reasonable notice particularly important for executives, professionals and highly compensated employees.
The Employment Contract Matters
One of the first documents that should be reviewed following a termination is the employee’s employment agreement.
An enforceable termination clause may limit an employee’s entitlement to the minimum standards established by the ESA. However, not every termination clause is enforceable.
If a termination clause is invalid or unenforceable, the employee may instead be entitled to common law reasonable notice.
This is why an employee should generally obtain legal advice before accepting a termination package or signing a release.
Employers should also ensure that their employment agreements contain carefully drafted and legally enforceable termination provisions. See our employment contracts services for more information.
Termination Pay Is Not the Same as “Severance”
In everyday conversation, “severance” is often used as a catch-all term for money paid following termination.
Legally, however, there are important distinctions:
| Entitlement | What it generally means |
|---|---|
| ESA termination pay | Minimum statutory compensation provided instead of the required advanced notice of termination, also known as the statutory notice period |
| ESA severance pay | An additional and separate statutory payment, available to eligible employees who satisfy the ESA requirements |
| Common law reasonable notice | Compensation reflecting the notice period required under the common law, unless validly limited by contract, inclusive of an employee’s ESA statutory entitlements |
The employer’s use of the word “severance” in a termination letter does not necessarily establish the employee’s full legal entitlement.
Should You Accept the Severance Package?
Employees are often asked to sign a release in exchange for a termination payment.
A release can significantly restrict an employee’s ability to pursue additional compensation or other legal claims. Once signed, it may be difficult or impossible to recover amounts that could otherwise have been available.
Before signing, employees should consider:
- What does the employment contract say?
- Is the termination clause enforceable?
- What are the employee’s ESA minimum entitlements?
- Is statutory severance pay also owed?
- What might the employee be entitled to under the common law?
- Are vacation pay, benefits, bonuses, commissions and other compensation properly accounted for?
- What rights would be surrendered by signing the release?
Our employment law services for employees include reviewing termination packages, assessing wrongful dismissal claims and advising employees about their rights following dismissal.
The Bottom Line
Ontario employees who are dismissed may have several different sources of entitlement.
The ESA establishes minimum rights to notice of termination or termination pay, and eligible employees may also qualify for statutory severance pay. Employees may also be owed accrued vacation pay, benefits and other outstanding compensation.
But the ESA minimums are not necessarily the end of the analysis.
Where an enforceable contractual limitation does not apply, an employee may be entitled to common law reasonable notice, which can be substantially greater than the statutory minimum. That entitlement may also include compensation for lost benefits, bonuses, commissions and other components of compensation.
For employees, the practical lesson is straightforward: do not assume that an employer’s severance offer represents the full amount legally available.
For employers, compliance with the ESA is equally important, but so is understanding whether an employment agreement effectively limits common law liability.
Before accepting a termination package or signing a release, it is often worthwhile to have the proposed terms independently reviewed. Please do not hesitate to contact Pelsmakher Law, to speak with an Employment Lawyer, to review your severance entitlements.
Related Resources: · Employment Law for Employees · Employment Contracts
