What is severance of employment?

A person's employment is "severed" when the employer:

• dismisses or stops employing someone, even when it is due to the employer's bankruptcy or insolvency
• "constructively" dismisses the employee and the employee resigns in response within a reasonable period of time (see "What is a constructive dismissal?")
• lays the employee off for 35 weeks or more in any period of 52 consecutive weeks
• lays the employee off because all of the business at an establishment is permanently discontinued, or
• gives the employee written notice of termination and the employee resigns after giving two weeks' written notice, and the resignation takes effect during the required notice of termination period.

What is severance pay?

"Severance pay" is compensation that's paid to a qualified employee who has his or her employment "severed." It compensates an employee for loss of seniority and job-related benefits. It also recognizes an employee's years of service.

Severance pay is not the same as termination pay, which is given in place of the required notice of termination of employment.

Who qualifies to receive severance pay?

An employee qualifies for severance pay when his or her employment is severed and he or she:

• has worked for the employer for five or more years (including all time spent by the employee in employment with the employer, whether continuous or not and whether active or not)

  and

• was employed by an employer who
  • has a payroll in Ontario of at least $2.5 million

    or

  • severed the employment of 50 or more employees in a six-month period because all or part of the business was permanently discontinued.

Certain employees are not entitled to severance pay under the ESA. For example, employees who are guilty of willful misconduct, disobedience or willful neglect of duty that isn't trivial, and has not been condoned by the employer, are not entitled to severance pay. Also, certain construction employees aren't covered, nor are employees who refuse an offer of reasonable alternative employment.

Many of the exemptions from the ESA are complex. Contact the Ministry of Labour for further information.

How much severance pay are employees entitled to?

To calculate the amount of severance pay an employee is entitled to receive, multiply the employee's regular wages for a regular work week* by the sum of:

• the number of completed years of employment

  and

• the number of completed months of employment divided by 12 for a year that is not completed.

* See regular wages and regular work week

Note: A special method of calculating severance pay applies to employees who don't have a "regular work week" or are paid on a basis other than time worked (e.g., piece-work rate or commission.)

When must employees receive their severance pay?

An employee must receive severance pay no later than seven days after his or her employment is severed or what would have been his or her next regular pay day, whichever is later.

However, an employer may pay severance pay in installments with the written agreement of the employee or the approval of the Director of Employment Standards, Ministry of Labour. An installment plan can't exceed three years. If an employer fails to make a scheduled payment, all of the severance pay still owing to the employee becomes due immediately.

How do recall rights affect termination pay and severance pay?

A "recall right" is the right of an employee on layoff to be called back to work by his or her employer under a term or condition of employment. This right is commonly found in a collective agreement.

Employees who are eligible for severance pay and, where their employment is considered terminated because they have been on layoff for 35 weeks or more, termination pay, and who also have recall rights, must choose either:

• to keep their recall rights, and not be paid for termination pay and/or severance pay at that time (In this case, the employer pays the termination and/or severance pay to the Director of Employment Standards, Ministry of Labour, and it is held in trust* until the employee is recalled or the employee gives up his or her recall rights or the recall rights expire. If the employee is recalled, the money is paid back to the employer. If the employee gives up his or her recall rights or the recalls rights expire, the money is paid to the employee.)

  or

• to receive the termination and/or severance pay, and give up their recall rights.

If an employee is entitled to both termination pay and severance pay, he or she must make the same choice for both.

*If the employee is represented by a union, the employer and union must attempt to come to an arrangement to hold the money in trust. If that attempt is not successful, the union must notify the Director of Employment Standards and the employer in writing and the employer will then pay the termination and/or severance pay to the Director of Employment Standards to hold in trust.

What about Employment Insurance?

For questions about Employment Insurance call Human Resources Development Canada (HRDC): Employment Insurance Telemessage General Inquiries. The telephone number is listed in the Blue Pages of your telephone book under "Employment."