Company Size Affect the Value of a Severance Package

Whether you’re hiring new employees or selling your business, understanding and adhering to severance pay obligations is a crucial part of employee termination and payroll management. While the minimums outlined in the Employment Standards Act (ESA) provide an important baseline for severance package payouts, common law considerations—such as years of service and position—play a major role in determining the value of a severance package. In this blog, we explore how severance packages are calculated in Ontario and examine best practices to ensure legal compliance for both employees and employers.

Severance pay is a lump sum payment made upon an employee’s termination, which usually includes their salary up to the last day of work, as well as unused vacation days and personal holidays. It’s also often accompanied by an outgoing employee’s letter of resignation. While it’s not legally required, severance packages are a common practice to help employees with the transition to a new job. It’s also worth noting that if your contract stipulates a higher amount of everance pay Ontario than the ESA minimums, you must honor these terms.

A recent ruling by an Ontario divisional court could have significant extra-jurisdictional implications for U.S. companies, even those with only a small presence in Canada. The Divisional Court ruled that when analyzing an employee’s entitlement to severance pay, the $2.5 million payroll threshold of the ESA applies to the entire global company—not just its Ontario operations.

Severance Pay in Canada – Can Company Size Affect the Value of a Severance Package?

Moreover, the court’s decision clarified that even if an employer terminates an employee without cause, they still have to provide them with the equivalent of their regular wages for a standard week, as outlined in the ESA. This is in addition to the mandatory termination notice.

Severance pay in Ontario operates within a legal framework established primarily by the Employment Standards Act (ESA). This legislation sets forth the minimum standards for employment in the province, ensuring that workers are treated fairly and equitably. Under the ESA, employees become eligible for severance pay if they have completed five or more years of service with their employer and meet certain criteria relating to the size of the employer’s workforce.

While the ruling is a major change for Canadian employers, it may not be as far-reaching for multinational businesses that have only a small presence in Ontario. However, that could change with future court decisions or changes in legislation.

Regardless of the size of your workforce, it’s critical to have a thorough understanding of the laws in your jurisdiction regarding severance packages and what they are actually worth. While the minimums outlined in the ESA set an important baseline for severance packages, many employees are entitled to much more than these amounts, and it’s vital that you have accurate numbers and the proper paperwork before you fire any employees. By working with Knit, you can rest assured that your company’s severance pay will be calculated correctly and that all your employees are properly compensated for their hard work and dedication. Contact us today to get started!