How Much Severance Pay Is an Employee Entitled to in Ontario?

What Ontario’s severance pay formula looks like

Who qualifies for severance pay

Under the Employment Standards Act, 2000 (ESA), an employee qualifies for severance pay if their employment is “severed” and two conditions are both met: they have worked for the employer for five or more years (all time with that employer counts, whether continuous or not, whether active or not), and the employer either has a global payroll of at least $2.5 million, or severed 50 or more employees in a six-month period because all or part of the business permanently closed.

Employment is considered “severed” when the employer dismisses or stops employing the employee (including through bankruptcy or insolvency), constructively dismisses the employee and the employee resigns within a reasonable time in response, lays the employee off for 35 or more weeks within a 52-week period (or beyond an approved extended layoff), or permanently closes the business establishment. An employee who resigns with two weeks’ notice within the statutory notice period, after receiving termination notice, is also treated as severed.

Severance pay compensates a qualified employee for losses tied to long service, such as loss of seniority, and it is different from termination pay, which compensates for lack of working notice before dismissal.

How the calculation works

To calculate severance pay, multiply the employee’s regular wages for a regular work week by the sum of their completed years of employment and their completed months of employment in a partial year divided by 12. For employees not paid strictly by hours worked, “regular wages for a regular work week” is the average of the regular wages actually received in the weeks worked during the last 12 weeks of employment.

Termination notice period weeks, whether the employee actually works them or is paid in lieu of working notice, are included when counting the completed years and months of employment used for this calculation. The result is capped: the maximum severance pay required under the ESA is 26 weeks, no matter how long the employee’s service.

When severance pay is not owed

Even a long-service employee at a qualifying employer is not entitled to statutory severance pay in certain circumstances. These include refusing an offer of “reasonable alternative employment” with the employer, refusing reasonable alternative employment available through a seniority system, or retiring on a full pension that recognizes all years of service the employee would otherwise have worked. Other exclusions under the ESA cover situations such as a permanent closure caused by a strike, employment in construction or on-site maintenance, wilful misconduct, and frustration of contract for reasons other than bankruptcy, insolvency, or illness or injury.

Payment timing and installments

Severance pay must reach the employee either seven days after employment is severed, or on what would have been the employee’s next regular pay day, whichever is later. An employer can instead pay in installments, but only with the employee’s electronic or written agreement, or with approval from the Director of Employment Standards at the Ministry of Labour, Immigration, Training and Skills Development. Any installment plan is capped at three years, and if the employer misses a scheduled payment, the entire outstanding severance pay becomes due immediately.

Severance pay is a statutory floor, not the whole picture

The ESA’s termination and severance rules set minimum requirements. They are entirely separate from any common law rights an employee may have, and an employee may be able to sue for wrongful dismissal instead of relying on the ESA minimums. However, an employee cannot do both: filing a ministry claim for termination pay or severance pay and suing for wrongful dismissal over the same termination are mutually exclusive; the employee must choose one route.

Where the numbers commonly get confused

The two most common points of confusion are treating termination pay and severance pay as the same thing, and assuming the five-year and $2.5 million (or mass-layoff) thresholds do not apply to a particular employer. Both are separate legal tests under the ESA, and an employee can be entitled to termination pay without meeting the higher bar for severance pay, or vice versa in unusual layoff scenarios. Confirming which test the employer and employee actually meet, before assuming an amount, avoids miscalculating what is owed.