What is the Difference Between Termination Pay and Severance Pay? The Ontario Employment Standards Explained

As a leading employment law firm in Toronto, we understand the confusion that often arises around the concepts of termination pay and severance pay under the Ontario Employment Standards Act (ESA). These terms are frequently used interchangeably, but they represent distinct aspects of compensation when an employee's employment is terminated. In this blog post, we'll provide a comprehensive overview of the differences between termination pay and severance pay to help employers and employees better navigate these critical aspects of employment law.

Termination Pay:

Termination pay is compensation provided to an employee when their employment is terminated without cause. In simpler terms, it's the money an employer owes an employee when they are let go without any specific fault on the employee's part. The amount of termination pay is determined based on the following factors:

Notice Period: The ESA sets out minimum notice periods that employers must provide to employees before termination. If an employer chooses to terminate without giving the required notice, they are required to pay termination pay in lieu of notice. The length of the notice period depends on the employee's length of service with the company.

Regular Wages: Termination pay is calculated based on the employee's regular wages, including salary, hourly wage, and some benefits or allowances. It does not typically include overtime pay, bonuses, or other irregular compensation.

Severance Pay:

Severance pay, on the other hand, is a separate form of compensation provided to employees who have been employed for a certain period and whose employment has been terminated. Severance pay is distinct from termination pay and is based on the employee's length of service:

Length of Service: In Ontario, an employee is entitled to severance pay if they have been employed by the same employer for five years or more, and the employer has an annual payroll of at least $2.5 million. Severance pay is calculated based on the employee's regular wages, just like termination pay.

Formula: The ESA specifies that an employee is entitled to one week of pay for every year of service, up to a maximum of 26 weeks. The amount is determined using the employee's regular wages during the last completed week of work.

Key Differences:

Applicability: Termination pay applies to all employees who are terminated without cause, regardless of their length of service. Severance pay, on the other hand, is only applicable to employees who meet the specific criteria related to length of service and employer payroll size.

Purpose: Termination pay is meant to provide employees with compensation in lieu of the notice period required under the ESA. Severance pay recognizes an employee's long-term commitment to the company and offers financial support during the transition to new employment.

Calculation: While both termination pay and severance pay are calculated using the employee's regular wages, the formulas and circumstances under which they are paid differ significantly.

Conclusion:

Understanding the distinctions between termination pay and severance pay is crucial for both employers and employees. Ensuring compliance with the ESA and providing fair compensation during employment termination requires a clear understanding of these concepts. If you're an employer or employee in need of legal guidance or assistance with employment matters, our Toronto-based employment law firm is here to help. We're dedicated to helping you navigate the intricacies of employment law and securing your rights in the workplace.