A Comprehensive Guide to Calculating Severance Pay under the Ontario Employment Standards Act

Introduction:

Losing a job can be a challenging and uncertain time for any employee. In Ontario, Canada, the Ontario Employment Standards Act, 2000 (ESA) aims to protect the rights of workers and ensure they are treated fairly during such transitions. Severance pay is an essential component of this protection, providing eligible employees with financial support upon termination. In this blog, we will delve into the key aspects of calculating severance pay under the ESA, empowering both employers and employees with a better understanding of their rights and obligations.

1. Understanding Severance Pay:

Severance pay is a form of compensation provided to employees who experience a termination without cause. Unlike regular pay or termination notice, severance pay is intended to help employees transition into new employment opportunities by providing financial support during their period of unemployment.

2. Eligibility for Severance Pay:

Not all employees are entitled to severance pay. To be eligible, an employee must meet certain criteria set out by the Ontario ESA:

The employee must have worked for the employer for at least five years continuously.

The employer must have a payroll of at least $2.5 million or terminate 50 or more employees within a six-month period due to a business closure.

It is important to note that severance pay does not apply to employees on fixed-term contracts, seasonal workers, or individuals employed for a specific project or task.

3. Calculating Severance Pay:

The formula used to calculate severance pay under the Ontario ESA is relatively straightforward. The employee is entitled to one week's pay for each completed year of service, with a maximum of 26 weeks. To calculate a week's pay, the following steps are followed:

a) Determine the regular weekly wages of the employee: This includes salary, hourly wages, commissions, and other regular compensation.

b) Calculate the average weekly overtime pay (if applicable): If the employee received overtime pay regularly, it should be factored into their average weekly earnings.

c) Include any other taxable earnings: Bonuses, holiday pay, and other taxable earnings are added to the total weekly wages.

d) Divide the total by the number of weeks worked: To arrive at the average weekly pay, divide the total weekly wages by the number of weeks the employee worked.

4. Example Calculation:

Let's consider an example to illustrate the process better:

Suppose an employee worked for a company for 10 years with a weekly salary of $800. Additionally, they received an average of $50 in weekly overtime pay, and their annual bonus amounted to $2,000.

Step 1: Regular weekly wages = $800
Step 2: Average weekly overtime pay = $50
Step 3: Total weekly wages = $800 + $50 + ($2,000/52 weeks) = $838.46 (approx.)

The severance pay would be $838.46 x 10 years = $8,384.60 (approx.)

Conclusion:

Understanding severance pay calculations under the Ontario ESA is crucial for both employers and employees. For employees facing job loss, it ensures they receive the compensation they are entitled to, offering a measure of financial security during this difficult time. Employers, too, benefit from clarity on their obligations, fostering a fair and respectful work environment. By adhering to the regulations set out in the ESA, Ontario continues to prioritize the well-being of its workforce, promoting a harmonious relationship between employers and employees.

Contact Randy Ai Law Office for a free legal consultation today.