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Understanding Termination Pay in Ontario

In Ontario, termination compensation is an important aspect of employment law intended to safeguard workers’ rights who are terminated without just cause. Employees who do not receive an appropriate notice period prior to their termination may be entitled to termination compensation under the Ontario Employment Standards Act (ESA). This compensation helps individuals transition to other job prospects and provides financial support following unexpected termination.

If employers fail to provide this notice, they are required to offer termination compensation equivalent to what the employee would have earned during the notice period. This includes regular wages, as well as any other compensation the employee would have received, such as benefits, bonuses, and commissions.

However, some employees, including those with less than three months of continuous service or those terminated for just cause, might not be eligible for termination pay. For most employees, though, termination pay ensures financial stability during a potentially challenging time for employees who are transitioning jobs.

It is important for employers to understand how termination pay works so that employers can ensure they are in compliance with the ESA. Understanding how termination pay works also helps protect the rights and interests of all parties involved, including the rights and entitlements of the employees themselves.

What is Termination Pay?

Termination pay is money that an employee receives when their employment is terminated without proper notice as required by law. It can be viewed as a substitute for the notice period the employee should have received.

In Ontario, there are two kinds of termination pay. First, there is ‘pay in lieu of notice’ which is provided when an employer chooses to terminate an employee immediately without the required notice period. The second type of termination pay is ‘severance pay,’ which refers to the additional compensation provided to long-term employees who meet certain criteria, such as having worked for a company with a payroll of at least $2.5 million or being part of a mass layoff.

In Ontario, employees who are terminated without just cause and without sufficient notice are typically entitled to termination pay. However, it is important to note that there are several exclusions, including employees who have not completed three months of continuous employment, employees who are terminated for good reason, and workers in particular industries who are excluded from the ESA’s termination requirements.

Who is Eligible for Termination Pay in Ontario?

According to the ESA, employees who put in at least three continuous months of employment are entitled to one week of notice period pay for each year of service completed, up to a maximum of eight weeks. They are called “minimal statutory entitlements.”

Most employees in Ontario are entitled to termination pay if they are terminated without cause and not given sufficient notice. However, there are exceptions, such as employees who have not completed three months of continuous service, employees who are terminated for just cause, and those in specific industries exempt from ESA termination provisions. Additionally, certain professionals, like architects, lawyers, and teachers, might have different entitlements under their specific professional regulations.

Some professions that are generally exempt from termination pay include building contractors, seasonal employees, federally regulated employees, and students in work-study placements.

Can an Employee Receive both Termination Pay and Severance Pay in Ontario?

Yes, an employee can receive both termination pay, and severance pay, but they are two different kinds of entitlements. Termination pay compensates for the lack of notice, while severance pay is provided to long-term employees of larger employers (with a payroll of $2.5 million or more) who have worked for five or more years.

On the other hand, severance pay is calculated as one week of pay per year of service, up to a maximum of 26 weeks. An employee eligible for both would receive termination pay first, followed by severance pay.

Understanding Workplace Investigations

How is Termination Pay Calculated in Ontario?

The ESA is responsible for setting the minimum notice period, which is generally one week per year of service, up to a maximum of eight weeks. For example, if an employee earns $1,000 per week and has been with that company for four years, they would be entitled to four weeks of termination pay, resulting in a total of $4,000.

Employees who have worked for less than three months are not eligible for notice; those who have worked for three months to a year are entitled to one week; and those who have worked for eight years or longer are entitled to eight weeks of notice.

Employers are mandated by law to preserve the employee’s normal employment conditions, including any benefits and incentives they would have received, during the notice period. This ensures that employees receive fair compensation and renumeration as they transition to other job prospects. By following these tips, employers can better ensure that they are in compliance with the ESA and can mitigate the risk of any potential legal challenges.

What to do if you Did not Received Termination Pay you are Entitled to?

If an employee believes they are entitled to termination pay but did not receive it, they should first review their employment contract and the ESA to understand their rights. If the employer is not compliant, the employee can file a claim with the Ministry of Labour, Training and Skills Development. The claim must be filed within two years of the date of termination. Given the nuanced nature of this area of law, employees would benefit from seeking legal advice to understand their options and ensure they receive the compensation they are entitled to.

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Recent Cases

P. W. v. Fred Deely Imports Ltd., 2017 ONCA 158, 2018

In this case, the ONCA addressed the termination of P.W., an employee with eight years of service who was terminated without just cause. P.W. was provided with termination pay; however, the employer halted P.W.’s benefits during this notice period.

The omission of benefits led to a legal dispute concerning the comprehensive nature of termination pay packages under the ESA. The key legal issue in this case was whether the termination pay package should include benefits continuation during the notice period. P.W. asserted that the termination pay should encompass all aspects of his compensation, including health and dental benefits, which he would have received had he continued working throughout the notice period.

The ONCA ruled in favour of P.W., in recognition of the concept that termination pay is meant to place the employee in the same financial position they would have been in if they had worked through the notice period. This holding required the employer to include benefits continuation as part of the termination pay package, ensuring that employees receive all components of their compensation during the notice period.

The Court emphasized that omitting benefits would undercut the protective intent of the ESA, which serves to provide comprehensive financial support to employees during their transition to new employment opportunities. This case shows the importance of including all elements of an employee’s compensation in termination pay packages, not just the base salary. It also sets a precedent that benefits such as health, dental, and other insurance coverages must be continued during the notice period to comply with the ESA. The decision helps ensure that employees are not put at a disadvantage as a result of an abrupt loss of benefits.

By ruling that benefits continuation is an integral part of termination pay, the ONCA provided much-needed clarity on the obligations of employers and reiterated what the rights of employees are.

L.P. v. TeraGo Networks Inc., 2016 ONCA 618

In this case, the Court examined the termination of L.P., an employee who was terminated without just cause and received termination pay. However, the termination pay provided did not cover the entire notice period to which L.P. was entitled under the ESA. L.P. argued that his termination pay should have included compensation for the full notice period, encompassing not only his base salary but also bonuses and other forms of compensation he would have earned had he worked through the entire notice period.

This case also raised important legal questions about the completeness and adequacy of termination pay packages, particularly the inclusion of all forms of remuneration. The ONCA ruled in favor of the employee L.P., determining that the employer’s obligation to provide termination pay extended beyond the mere base salary. The Court highlighted that termination pay must correspond to the total compensation the employee would have received during the notice period. This includes regular wages, bonuses, commissions, and any other earnings that are part of the employee’s standard compensation package.

This ruling emphasized that employers have an obligation to ensure that termination pay packages are comprehensive, covering all aspects of an employee’s compensation to maintain financial stability during the transition period. The Court’s decision emphasized the importance and obligation for employers to adhere strictly to the ESA requirements, in ensuring that employees receive the comprehensive compensation package that they are entitled to for the entire notice period.

About the Author

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Jordan Donich

Jordan Donich has been a Lawyer for over 10 years and is a trusted legal analyst by Canadian Media. He is as a leader in Canada’s tech sector for lawyers and developer of Law Newbie. Jordan is a Black Belt with the Japan Karate Association and trained in Krav Maga. He won a Gold Medal at 2004 Canadian National Championships and was published in the National Newspaper Awards.

Jordan has been featured in Forbes and is a member of DMZ Angels in Toronto.