Whether due to downsizing, restructuring, quality of work, or otherwise, letting go of an employee is never an easy process. Putting emotions aside, there are a lot of technical aspects, such as Ontario labour laws, that need to be considered when terminating an employee—one of the biggest ones being termination pay. If employers don’t follow the correct termination regulations, they put themselves at risk of getting sued. Needless to say, if you’re terminating an employee, you should check to make sure you’re following the provincial rules.
Don’t worry, we’ve got you covered. In this post we outline everything you need to know about termination pay in Ontario, from who qualifies to the employer’s responsibilities.
If you’re looking for a quick outline on termination pay in other Canadian provinces, please see here.
What is Termination Pay and Who Qualifies?
First off, it’s important to understand the difference between severance pay and termination pay. Though often used interchangeably, they are not the same thing.
Severance pay is compensation that is paid out to an employee who has their employment "severed”. It’s important to note that not everyone is entitled to severance pay. It’s seen as payment for long serving employees who have worked for a company that has a total annual payroll of $2.5 million or more for at least five years. You can read more about Ontario severance pay here.
Termination pay is given in place of the required notice of termination, which includes a lump sum payment equal to the employee’s regular wages for a regular work week. *A portion of unused vacation days will also be paid out in this lump sum. Employees in Ontario who work more than three months with a company are entitled to termination pay upon dismissal. The amount of termination pay awarded is the amount of income which the employee would have earned from their employer during the period of required “reasonable notice”.
*According to the Ontario Government: “Vacation with pay is the time an employee can take off work and be paid vacation pay. Most employees are entitled to two weeks of vacation every 12 months and vacation pay of 4% of their wages, or three weeks of vacation every 12 months and vacation pay of 6% of their wages if they have been employed by the same employer for five years or more.”
When are Employers Required to Pay Termination Pay?
As mentioned above, an employee who has been continuously employed for over three months is entitled to either notice of termination, or termination pay instead of notice. If an employer chooses the later (termination pay), they are required to provide payment within seven days of termination, or on the employee's next regular pay date, whichever is later.
What’s the difference between constructive dismissal and temporary layoff?
According to the the Employment Standards Act, 2000 (“ESA”) a person’s employment is technically terminated if the employer:
- Stops employing or dismisses an employee, including cases where the employee is laid off due to bankruptcy or insolvency of the employer
- "Constructively" dismisses an employee and the employee resigns, in response, within a reasonable time
- Lays an employee off for a period that is longer than a "temporary layoff"
When an employee makes it past their probation period by being continuously employed for three months or more, the employer must do one of two things:
- Give written notice of termination where they are able to continue working
- Provide termination pay instead of said notice.
The amount of notice that an employee is entitled to will sometimes be outlined in their employment contract. If not, then they would be granted the minimum notice under the Employment Standards Acts (ESA).
Termination Without Cause vs. Termination With Cause
Let’s get into the technicalities. Terminating an employee can be boiled down to two distinct differences: without cause, and with cause.
Termination without cause is when an employer terminates an employee without reason. If you’re an employer in Ontario, you are not required by law to give employees a reason for why they’re being terminated. In this situation employers must give termination pay, written notice, or both. This is often referred to as letting go of an employee.
Though employers in Ontario don’t technically need a reason for terminating an employee, there usually is a root cause, which may be one of the following:
- Restructuring the business
- Cost cutting
- Or poor work performance
Termination with cause is when an employer terminates an employee for a variety of reasons, all of which have to do with the actions or performance of an employee. This is often referred to as firing an employee.
Reasons an employee may be terminated with cause are:
- Guilty of serious misconduct
- Habitual neglect of duty
- Conduct incompatible with their duties, or prejudicial to the employer’s business
- Or if they have been guilty of wilful disobedience to the employer’s orders in a matter of substance
How are Mass Terminations Different From Regular Terminations?
There are times in which an employer may need to do a mass termination versus a regular termination. Though no employer wants to go through this experience, it’s actually more common than you may think. Particularly during the height of COVID19 in Canada, thousands of Canadian’s were laid off in masses from companies like Ritual, Leon’s and Reitmans.
A mass termination in Ontario is described as a layoff that includes 50 or more people within a four week period.
A regular termination is described as an employee's departure from a job, therefore the end of an employee's work with an employer. Terminations may be voluntary (decided by the employee), or involuntary (therefore initiated by the employer).
How to Know if You’re Exempt From Termination Pay?
There is actually a long list of people who may be exempt from termination pay. Below are a few of the most common reasons why, outlined by the Ontario Government.
An employee is exempt from termination pay if:
- They are guilty of wilful misconduct, disobedience or wilful neglect
- Employed in construction
- Refused an offer of reasonable alternative employment with the employer
- Have been temporarily laid-off
- Do not return to work within a reasonable time after being recalled to work from a temporary layoff
- Are terminated during or as a result of a strike or lockout at the workplace
- Have lost their employment because the contract of employment is impossible to perform
Check out the full list to find out more about termination pay exemptions in Ontario
Some industries and jobs—such as hospitality, government and healthcare—follow a unique set of rules, which you can learn more about here.
For employers that are unsure of who is exempt from termination pay, you can contact the Employment Standards Information Centre, 1-800-531-5551.
What are the Employer’s Responsibilities?
As an employer terminating an employee or employees, there are a handful of responsibilities you must follow in order to conduct a proper termination. As an employer in Ontario, you are obligated to provide a written notice of termination, termination pay or a combination. The Employment Standards Act (ESA) does not require employers to give an employee a reason for why their employment is being terminated.
Also, it’s illegal for an employer to terminate an employee without cause while they are on pregnancy, parental, or personal leave. For example, an employer cannot threaten, fire or penalize an employee who takes or plans on taking emergency leave.
What is a Written Notice of Termination?
A written notice of termination is exactly what it sounds like: a document (either digital or physical) that notifies the employee of their termination. This notice should outline things like the amount of termination pay they will be given. This written notice is given in place of termination pay.
Here’s a great example of a termination notice that you can pull ideas from.
What is the “Notice Period” and Why Does it Matter?
The notice period given to employees is the duration of time they have left with the company before they are terminated. In regards to termination pay, this duration dictates the amount they will be paid out in a lump sum.
The period of notice upon termination (or the amount of termination pay given) will vary per employee, depending on their tenure at the company. Below is an outline of the minimum notice requirements. It’s important to note that employers are allowed to provide more notice than legally required.
Employers should also check with each individual employment agreement if they have been customized at all. In some circumstances, an employee may request a certain amount of termination notice before signing with the company—in fact, this has become more commonplace over the years within industries that are more volatile (like tech startups).
What is an ROE?
Simply put, an ROE is an employee’s record of employment. It’s what employee’s use when applying for EI benefits, making it pretty darn important.
Anytime an employee experiences an interruption in their earnings (such as a termination or temporary layoff), said employer will need to provide them with their ROE.
How do you calculate termination pay?
Calculating termination pay is fairly easy. The total pay is unique to the employee’s salary and tenure.
Example: Jimmy, Manager at John Doe Industries
Jimmy has been working as a Manager at John Doe Industries for 5 and a half years. He has just been told that his job has been terminated effective immediately without any written notice.
Jimmy worked 40 hours a week at $31.25 / hour, and also received 4% vacation pay. Since he worked for more than five years, but less than six years, he is entitled to 5 weeks termination pay in lieu of notice.
Below is Jimmy’s calculated termination pay:
- $31.25 an hour X 40 hours a week = $1250.00 a week
His termination pay is calculated at: $1250 X 5 weeks = $6250
- Then his vacation pay on top of termination pay is calculated:
4% of $6250 = $250
- Lastly, his vacation pay is added to the termination pay:
$6250 + $250 = $6500
Total: Jimmy is entitled to $6,500. It’s also the employers responsibility to continue any benefit or pension plan coverage for the total of five weeks after Jimmy’s termination.
You can use a free termination pay calculator if you’re not in the mood to do the math yourself!
When are you supposed to pay termination pay?
Lastly, after you’ve figured out a plan for terminating an employee or employees, you need to actually pay them!
Termination pay needs to be paid either on the employee’s next regular pay date, or seven days after the employment has been terminated, whichever is the latest.