Terminating an employee is never ideal. Awkward conversations, new job postings and complex employment legislation abound.
It’s a stressful time – so let’s take that last one off your plate.
As most business owners know, Canadian employment laws are dense—sometimes staggeringly so. For instance, Ontario saw 11,718 ESA violation investigations in the 2022-23 fiscal year.
Let’s answer one of the big questions about offboarding: what is the difference between termination pay and severance pay?
Why do you need to know the difference between termination pay and severance pay?
Why do you need to know the difference, anyway? Simple: they’re often conflated, but severance and termination pay are markedly different. In most cases, you’ll have to pay at least one of severance or termination pay. Sometimes both. To stay compliant, you’ll need to determine which is required and then how to calculate it.
Why are termination pay and severance pay so complex?
Herein lies the issue: the laws surrounding termination pay and severance pay in Canada are complex. Calculating them involves various factors, such as the length of employment, the reason for termination, and any contractual agreements in place. Plus, each province and territory in Canada has its own employment standards legislation.
Finally, and often through no fault of their own, many employers may not be fully aware of their obligations regarding termination pay and severance pay.
So read on – we’re here to change that.
What is termination pay?
Broadly, termination pay (also called pay in lieu of notice) is compensation provided to employees terminated without cause. It covers the employee’s wages during the notice of termination. Critically, termination pay differs from severance pay in that it covers the notice period rather than the loss of employment or any loyalty-based compensation.
When do you pay termination compensation?
If an employee has completed a minimum of three months of employment, and you need to end their employment immediately, you must pay termination compensation.
Whenever you terminate an employee over that three month threshold, you owe them notice of termination (again this notice period varies). Even if you don’t want that employee to continue working during that notice period, you must pay their regular wages. That’s termination pay.
Termination pay isn’t required if this employee hasn’t completed three months of continuous employment, leaves voluntarily, was dismissed with cause, was temporarily laid off, or the employment contract ended.
How do you calculate termination pay?
Employment standards laws mandate termination pay in Canada, but like most legislation, the minimum notice periods relative to an employee’s tenure vary by province.
The calculation is generally straightforward: you’re paying the employee’s regular wages during the notice period.
What is severance pay?
Severance pay is the compensation you owe an employee after terminating them. While termination pay covers the notice period, severance helps your employee cover their financial requirements until their next employment.
In Canada, eligibility for severance pay is often determined by factors like length of employment and reason for termination. The amount of compensation depends on provincial laws and contractual obligations. You can pay employees a lump-sum payment or spread the severance over time.
When do you pay severance?
Again, the severance rules differ by province, but if you terminate an employee who’s completed at least three consecutive months of ongoing employment, you likely owe that employee severance. This applies to both group and individual terminations (like lay-offs).
Generally, you’re not required to pay severance if the lay-off does not result in termination, the employee’s contract contains a specified end date, you dismiss the employee with cause, or the employee leaves voluntarily.
How do you calculate severance pay?
This is the tricky part – each province has its own employment standards legislation and rules for calculating severance pay.
Plus, while provincial ESAs outline your minimum severance obligations, you may also have to contend with common law severance packages, which consider things like age, position, industry, availability of employment and benefits packages.
Let’s look at Ontario and Alberta as examples of differing severance calculations.
Calculating severance pay in Ontario
Ontario provides examples for calculating severance pay in its guide to the Employment Standards Act.
First, they outline the requirements: you owe severance to employees who have worked for you for at least five years, and your payroll exceeds $2.5 million, or you’ve terminated 50 or more employees within a six-month period due to a permanent discontinuance of all or part of your business.
Assuming these conditions are met, you would multiply the employee’s regular weekly wage by the number of years they’ve worked for you and the number of months they’ve worked divided by 12—this is for the part of the year they haven’t completed.
The formula looks like this:
(Weekly wage) x (years + (month number / 12))
=(680) x (7 + 0.25)
=(680) x (7.25)
=$4930.
Calculating severance pay in Alberta
Conversely, Alberta does not explicitly require severance pay unless specified in the employment contract or collective agreement.
What’s the difference between severance pay and termination pay?
Let’s recap: termination pay is what you provide to employees who you’ve terminated without cause, typically in lieu of the notice period required by provincial employment standards legislation. It compensates employees for the period between the termination date and the end of the notice period and is typically just the employee’s regular wage during this period.
Severance pay, on the other hand, is the compensation you provide to employees after you terminate them to help them transition to new employment opportunities. The amount of severance you pay differs by province, but the calculations are generally based on the employee’s wage and tenure.
Do you have to pay both severance pay and termination pay?
While termination pay and severance pay serve different purposes, you may have to pay your employee both if their termination meets the criteria for each.
For example, if you terminate an employee without cause, you owe them their base termination pay to cover the notice period. But, say you’re in Ontario, your annual payroll exceeds $2.5 million, and this employee has worked for you for five years; you also owe that person severance pay.
Again, whether you owe severance and how much will depend on your province.
A simple solution: Canada’s first Offboarding Assistant
So, how do you navigate labour laws that change from province to province? How do you stay compliant and do right by your team?
Enter Canada’s first Offboarding Assistant. This digital assistant knows the regulations and can apply the facts to save you time.
Say you need to terminate an employee – you provide your digital assistant with the facts, and it’ll determine what’s relevant and then calculate your requirements based on the law. You’ll know your obligations regarding severance, termination and vacation pay.
Check out a demo! With your Assistant, there’s no more decoding employment laws or worrying about termination pay and severance pay.
