Notice Pay, Termination Pay, Severance Pay – What does it all mean?
In this post, we unpack the distinctions between these three concepts and explain how they are calculated for most provincially regulated, non-unionized employees. Appreciating the differences is critical for employees looking to assess the quality of their termination packages.
Many of the terms below are used interchangeably in ordinary conversations, despite having specific meanings at law, which can create confusion. For example:
-
-
- The term “pay in lieu of notice” often refers to broad common law (i.e. judge-made law) reasonable notice entitlements but also minimum statutory Termination Pay, both of which are different concepts described below.
- The term ‘severance package’ is often used to describe the overall termination/separation package an employer typically presents to an employee upon termination of employment. Statutory Severance Pay (described below) may be one piece of a separation package, which could also include a host of other components to assist an employee in their transition to new employment, such as lump-sum payments, salary continuation, benefits continuation, or payments in lieu of benefits.
-
Common Law Reasonable Notice Pay
Pay in lieu of reasonable notice is based on previous court decisions known as the ‘common law’. Pay in lieu of reasonable notice (which is also referred to as ‘damages for wrongful dismissal’) is designed to provide dismissed employees with income protection for a reasonable period in their transition to comparable new employment.
If you are going to court for a determination of your common law notice pay, a judge will look to a variety of factors to determine roughly how long it would reasonably take you to replace the job you lost with a comparable position.
Among many other factors, judges will account for your age, qualifications, length of employment, position, and the availability of similar employment in determining the reasonable length of your common law notice period. Judges recognize that older job seekers may struggle in finding new employment compared to their younger peers, and adjust the common law notice period upward as a result. Dismissed employees who had been earning at a higher rate of pay may be entitled to longer notice periods than lower-earning employees, given the relative scarcity of available positions at that pay rate.
Not all employees are entitled to common law pay in lieu of reasonable notice. The question of eligibility for common law notice pay is a complicated one that hinges on whether the dismissed employee’s employment contract contains legally enforceable language which displaces their entitlement to common law notice pay. If the language of your employment contract is legally unenforceable – as is often, though not always, the case – then you will typically be entitled to common law notice pay.
Note: If you are employed on a fixed-term contract basis, then you may have different entitlements, which may or may not exceed common law reasonable notice entitlements.
Additionally, if your employer could convince a judge that they had just cause (aka ‘cause’) to terminate your employment immediately, then you would not be entitled to common law notice pay. Just cause for termination will only be warranted for the most severe types of employee misconduct. If your employer alleges that your employment is being terminated for ’cause’, you ought to consult an employment lawyer to assess if your employer has grounds to terminate your employment in this fashion, which is rarely the case.
Statutory Termination Pay
Statutory pay in lieu of notice aka “Termination Pay” is also intended to compensate employees for the loss of income they experience when terminated from employment without adequate advance notice.
Generally, Termination Pay is a guaranteed minimum amount, which overlaps with greater common law pay in lieu of notice entitlements designed to provide protection on a reasonable basis.
Although Termination Pay is intended to provide employees with some minimum financial security while they navigate the uncertainty brought on by sudden job loss, the amounts tend to be inadequate. Unlike the common law notice period, Termination Pay is not based on analysis of what would be reasonable.
Your Termination Pay entitlements are determined by both the governing statute – for most employees in Ontario, this is the Employment Standards Act, 2000 (the “ESA”).
Most employees are entitled to Termination Pay, though there are some exceptions set out under the ESA. In the following and certain other circumstances, employees may find they are not entitled to Termination Pay:
-
-
- If you have not worked for your employer continuously for a period of at least three months, you will not be entitled to statutory notice pay.
-
-
-
- If you are guilty of certain types of wilful misconduct, disobedience, or neglect of duties, your employer may be able to terminate your employment without providing statutory notice pay. Note: your employer may accuse you of this type of behaviour to attempt to save some money and avoid their obligation to provide you your statutory entitlements. You will want to consult with a lawyer if this is the case to ensure your employer is not trying to taking advantage of you.
-
-
-
- If you are a construction worker, you are disentitled to statutory notice pay. Circle back to common law notice pay, construction workers – you may still have some entitlements!
-
The ESA makes calculating your statutory termination pay relatively straightforward.
| Length of Employment | Statutory Notice Entitlement |
| Less than 3 months | No notice required |
| 3 months to less than 1 year | At least 1 week of wages and benefits |
| 1 year to less than 3 years | At least 2 weeks of wages and benefits |
| 3 years to less than 4 years | At least 3 weeks of wages and benefits |
| 4 years to less than 5 years | At least 4 weeks of wages and benefits |
| 5 years to less than 6 years | At least 5 weeks of wages and benefits |
| 6 years to less than 7 years | At least 6 weeks of wages and benefits |
| 7 years to less than 8 years | At least 7 weeks of wages and benefits |
| 8 years or more | At least 8 weeks of wages and benefits |
Note: If you are one of 50 or more employees whose employment is dismissed at your employer’s establishment in the same four-week period, you may be entitled to greater minimum Termination Pay required in certain mass termination scenarios.
It is important to recognize that statutory Termination Pay is a minimum entitlement after a termination without notice. Your employer must provide you with any Termination Pay owed to you, and failure to do so can result in serious legal consequences for your employer for breaking the law.
While Termination Pay sets out your minimum entitlements, common law notice pay sets out your maximum entitlements.
Determining whether your employment contract legally limits your common law notice pay is a question best suited for a legal professional.
Statutory Severance Pay
Statutory Severance Pay functions similarly to notice pay, but involves more stringent eligibility criteria, and is designed to recognize an employee’s seniority, when their employment relationship is severed.
To be entitled to Severance Pay under the ESA, the following criteria must be satisfied:
1. An employee must have been employed for at least five years; and
2. The employer must have a payroll of at least $2.5 million or the employer must have permanently discontinued at least part of its business and terminated 50 or more employees in a six-month period.
If these eligibility criteria are satisfied, the amount of your Severance Pay entitlement will equal the sum of your wages for a typical work week: (i) multiplied by the number of completed years of employment and (ii) the number of completed months of employment divided by 12 for a year that is not completed.
Example: You have worked for your employer for 12 years and 6 months, earning $2,000 per week. You will receive 12.5 weeks of Severance Pay ($25,000) in accordance with the ESA.
The ESA sets an upper limit on the amount of Severance Pay you can earn. Severance Pay is capped at 26 weeks. Accordingly, a terminated employee with a tenure of 32 years would only be entitled to 26 weeks of Severance Pay.
Although the calculation should be relatively straightforward, employers often mistakenly calculate Severance Pay short of an employee’s full entitlement.
Takeaways
If you have received a termination package, you should talk with an employment lawyer to determine whether your employer has provided you with your statutory entitlements and whether you are entitled to common law notice pay.
Often, the termination package provided to an employee is a first offer rather than a final offer, and legal counsel can help you negotiate a more generous package that provides you with additional financial protection.
If you have questions about whether your employer is treating you fairly, contact Zubas Flett Liberatore Law LLP for counsel at 416-593-5844 or questions@employment-lawyers.ca.