Severance pay is an important concept for employees in Canada who are terminated without cause or laid off. However, the difference between federal and provincial regulations can mean thousands of dollars in your pocket.
This guide covers everything you need to know about severance pay, including eligibility requirements, how severance is calculated, factors that increase amounts, tax implications, exemptions, and tips for maximizing your settlement.
What is Severance Pay in Canada?
Severance pay is compensation provided to eligible employees who have been terminated without cause or laid off in Canada. It helps protect employee rights and provides financial assistance during unexpected job transitions.
There are four key purposes in Canadian employment law when claiming this payment:
- It offers financial support while you look for a new job.
- It acknowledges your loyalty and contributions to the company.
- It helps ease the financial burden of losing a job unexpectedly.
- It ensures that employees are protected from being fired without compensation.
When you meet specific criteria under employment standards legislation, severance pay becomes mandatory. However, not every terminated employee qualifies. These requirements vary among provincial, federal, and common law.
Who is Entitled to Severance Pay in Canada?
Federal employees require 12 months of continuous service. Meanwhile, in Ontario, employees of businesses with an annual payroll exceeding $2.5 million are required to have 5 years of continuous service. In addition, in some other provinces, such as British Columbia, Alberta, and Quebec, there are no laws requiring severance pay; only termination pay or notice is required.
Here are 5 situations that may qualify you for severance pay in Canada:
Being let go for reasons unrelated to performance, such as downsizing or restructuring, entitles you to compensation.
You will also receive severance pay if your employer makes significant changes to your employment conditions that effectively force you to resign. Some examples include demotions, pay cuts, and relocated workplaces.
Being laid off from your job for 35 weeks or more in 52 weeks makes you eligible for severance pay, even if the time is not consecutive.
Business closure:
If your employer shuts down part or all of its business permanently, resulting in loss of employment, you are eligible for severance pay.
Resigning After a Termination Notice:
To do so, you must provide your employer with a minimum of two weeks’ written notice of resignation. And it must take effect during the statutory notice period.
Beyond that, if you are working in Ontario, there are 9 cases in which you can not receive severance compensation:
- You voluntarily resign.
- Your retirement on a full pension, recognizing all years of service
- You are terminated for wilful misconduct, disobedience, or wilful neglect of duty
- You refuse reasonable job offers from your employer.
- You work in construction or building maintenance
- Your contract is frustrated by an unforeseeable event or circumstance
- Your business closed due to the strike effects
- You have less than 5 years of service
- Your employer’s payroll is under $2.5 million
How Severance Pay is Calculated in Canada
To calculate severance pay in Canada, follow these 3 steps:
Step 1: Determine your regular weekly wages by:
- multiplying your hourly rate by your standard weekly hours, or
- dividing your annual salary by 52.
Step 2: Calculate your total years of service. It includes your total years of service, accounting for any partial years.
Step 3: Multiply these two numbers together to get this formula: Severance Pay = Regular Weekly Wages x Years of Service
Note that, the result cannot exceed 26 weeks of pay under statutory requirements.
This formula applies to both federal and Ontario employment laws, but the eligibility requirements differ. Federal employees need 12 months of service, while Ontario employees need 5 years.
Here are two examples to help clarify the differences between federal and Ontario laws:
Federal Employee Example
Sarah works at TD Bank, earning $28 an hour for 37.5 hours a week. She has been employed for 3 years and 8 months. This duration is more than 12 months of service, so she qualifies for federal severance pay. Here is the calculation in this scenario:
- Weekly wages: $1,050 ($28 x 37.5 hours)
- Years of service: 3.67 years (3 years + 8 months)
- Severance pay: $3,853.50 ($1,050 x 3.67)
Ontario Employee Example
Mark has worked for a manufacturing company in Toronto for over 10 years. His annual wage is $85,000. The company’s payroll is over $5 million and he has more than the required 5 years of service. Therefore, he is eligible for severance pay and the formula is:
- Weekly wages: $1,634.62 ($85,000 / 52 weeks)
- Years of service: 10.17 (10 years + 2 / 12 months)
- Severance pay: $16,624.08 ($1,634.62 x 10.17)
Factors That Influence Severance Pay Amounts
While the calculations above determine basic statutory severance, it is necessary to understand 3 factors that can impact the amount of severance pay:
- Type of work: More specialized roles with higher responsibility justify greater compensation.
- Benefits: The discontinuation of benefits upon termination may warrant additional compensation.
- Invalid termination clauses: If the termination clause in your employment contract is invalid or unenforceable, you may be entitled to more than what is stated.
If an employer does not pay employees what they are owed or fails to meet the legal minimum, employees can file a complaint or take legal action.
How Severance Pay Affects Your Income Taxes
Severance pay counts as employment income for tax purposes, subject to your marginal tax rate. The Canada Revenue Agency treats it the same as wages earned from work.
Your employer will deduct income tax from your severance pay, and the rate depends on how much you receive and the payment method. So, they may allow employees to choose how they receive severance pay.
There are four primary ways severance pay is provided to employees:
- Lump sum payment: A single payment for the full severance amount owed is issued to the employee. Income tax, CPP, and EI will be deducted by the employer. Tax rates depend on the province and the total severance amount.
- Direct RRSP transfers: Employees can request that employers transfer the severance amount directly into a Registered Retirement Savings Plan (RRSP) account. This allows the severance payment to avoid immediate taxation.
- Salary continuance: Regular salary payments and benefits continue for the length of the severance notice period and are typically taxed as employment earnings. This means CPP, EI and income taxes are deducted as regular payroll.
- Installment payments: Severance paid out in installments over an agreed timeframe, up to 3 years. Taxes are only paid on the portion of severance received each year it is paid out.
It must be provided to employees on the later of the two dates:
- Seven calendar days after the last day of employment
- The employee’s next regular payday after termination
Employers may pay severance in installments with the employee’s consent or with the Ministry of Labour’s approval. However, failure to make payments as scheduled will immediately make the full remaining amount due.
How to Maximize Canada Severance Pay
To get the most out of your severance pay, you need to know the minimum amounts required by law and the possible additional benefits you could receive. Follow these 7 key tips to ensure you maximize the severance settlement you are entitled to:
- Ignore employer deadlines: There are no legal time limits to accepting a severance offer. Don’t let false deadlines pressure you.
- Calculate using an online severance calculator: Get a rough estimate of what you are legally owed before accepting any offer.
- Consult an employment lawyer: Over 90% of employers lowball initial offers. Have an expert review before signing anything.
- Don’t contact the Ministry of Labour first: The Ministry can only provide minimums. An employment lawyer can pursue your full common law entitlements.
- Question termination for cause: Many supposed performance issues are pretenses to avoid paying severance.
- Review your employment contract: Many contracts have invalid termination clauses that cannot supersede common law.
- Note the 2-year limitation period: If dismissed, you have 2 years to pursue legal action to claim the severance you deserve.
The bottom line
Severance pay laws in Canada are complex, but vital to understand if you find yourself unfairly terminated or laid off. Taking the time to calculate what you are owed based on your specific situation and working with an employment lawyer to review any severance offers or employment contracts is crucial to receiving fair compensation.
With greater awareness of your severance pay rights, you can alleviate financial uncertainty and make the difficult transition between jobs a little easier.
FAQs on severance pay in Canada
What is considered regular wages for severance pay?
For salaried employees, regular wages are based on typical weekly earnings. For commission or variable pay, it is calculated using the average earnings over the last 12 normal weeks worked.
Where is severance pay regulated in Canada?
Severance pay is regulated through a combination of provincial and federal legislation, as well as common law precedents set by prior court decisions.
Why does severance pay increase under common law?
Common law takes into account many factors like age, salary, benefits lost, and ease of finding new work that increase severance amounts beyond basic statutory minimums.
Do all terminated employees get severance pay?
In most cases yes, but some exceptions exist, like termination for willful misconduct or refusing reasonable alternative work.
Can employers avoid paying severance with termination clauses?
Sometimes, but many contract termination clauses are unenforceable if they contradict common law entitlements.
Is severance pay considered taxable income?
Yes, severance pay is considered employment income and is subject to tax withholdings and deductions.
