Termination pay and severance pay are not the same thing, despite many Ontario employers using these terms interchangeably. Confusing these distinct entitlements leads to underpayment, Employment Standards Act (ESA) complaints, and costly legal disputes.
Here’s what you need to understand.
Termination Pay: Nearly Every Employee Qualifies
Termination pay is compensation in lieu of working notice. Under the ESA, employers must provide advance written notice of termination or pay instead of that notice.
Almost every employee terminated without cause qualifies for termination pay after three months of employment. The entitlement scales with service:
- Three months to one year: one week
- One year to three years: two weeks
- Three years to four years: three weeks
- And so on, up to eight weeks maximum after eight years
Even employees terminated for cause may receive ESA termination pay. The ESA “wilful misconduct” threshold is extremely high—far higher than common law just cause. Unless the employee deliberately engaged in serious wrongdoing, termination pay remains owing.
Severance Pay: Additional and Separate
Severance pay is a separate entitlement that compensates long-service employees for their investment in the organization. It’s calculated differently and has different eligibility requirements than termination pay.
An employee qualifies for severance pay only when both conditions are met:
Condition one: The employee has five or more years of service.
Condition two: The employer has a global payroll of $2.5 million or more, OR the termination is part of a mass layoff affecting 50 or more employees within six months.
When both conditions are satisfied, the employee receives one week of severance pay for each year of service, up to 26 weeks maximum. Partial years are prorated.
Why the Distinction Matters
Eligible employees receive both termination pay and severance pay—they’re cumulative, not alternative.
Consider an employee with ten years of service at a company with $3 million global payroll, terminated without cause. Their ESA entitlements include:
- Termination pay: eight weeks
- Severance pay: ten weeks
- Total minimum entitlement: 18 weeks’ pay
Many employers mistakenly offer only eight weeks, believing that’s the maximum. They’re then surprised by ESA complaints or demand letters seeking the additional ten weeks of severance.
Common Employer Errors
Ignoring the payroll threshold. Small companies often assume severance doesn’t apply to them. But “global payroll” includes all associated or related businesses. Multiple corporations with common ownership may combine payrolls, pushing total payroll above $2.5 million.
Forgetting recent acquisitions. When you purchase another business, employees typically retain their service from the prior employer for severance purposes. That new employee with two years at your company may have 15 years of total service.
Misunderstanding mass termination rules. Terminating 50 employees over six months triggers severance obligations regardless of your payroll size. This catches employers who conduct rolling layoffs without tracking cumulative numbers.
Confusing ESA and common law. The ESA provides minimum entitlements only. Common law reasonable notice—what courts award in wrongful dismissal cases—is typically much higher and doesn’t distinguish between “termination” and “severance.” An employee entitled to 18 weeks under the ESA might receive 12 to 18 months’ notice at common law.
Calculating Correctly
Proper termination and severance calculations require accurate service dates, payroll information, and understanding of corporate relationships. Errors in either direction cause problems—underpayment invites complaints, while overpayment wastes resources.
Before finalizing any termination package, verify your ESA obligations and consider common law exposure. Many employers find that consulting legal professionals at top employment law firms like GreenwoodLawyers.com before termination saves significant expense compared to addressing mistakes afterward.
Understanding the distinction between termination pay and severance pay isn’t just legal compliance—it’s sound business practice that protects your organization while treating departing employees fairly.
