An Overview of Terminations and Severance Entitlements in Ontario

The Nature of Termination: Cause vs. Without Cause

The foundational step in determining an employee's rights is the correct classification of the dismissal. The law recognizes two primary categories, each with distinct legal consequences for the employer's obligation to provide notice or pay. However, just because an employer terminates an employee for cause does not necessarily mean the employee's behaviour met the test for cause. 

1. Termination Without Cause

Termination without cause occurs when the employer unilaterally ends the employment relationship, and the dismissal is not the result of proven, serious employee misconduct.

• Employer's Right: Employers possess an inherent right under common law to terminate an employee without cause, provided they fulfill the obligation to furnish reasonable notice of termination, or pay in lieu thereof, which is commonly referred to as a severance package. The employer is not legally required to demonstrate a "good" or "just" reason for this type of dismissal; reasons such as corporate restructuring, downsizing, or a change in business needs are legally sufficient, provided they are not discriminatory or retaliatory.

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• The Bona Fide Rule: The termination must be genuine and not undertaken for an ulterior or illegal motive, such as violating the Ontario Human Rights Code (OHRC) or enacting a reprisal against an employee for asserting a right under the ESA or other statutory legislation.

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• Constructive Dismissal: This is a legally equivalent form of termination without cause. It occurs when an employer unilaterally makes a fundamental, substantial change to a core term of the employment contract (e.g., a significant demotion, a substantial reduction in salary, or a material change in geographic location) without the employee's consent. The employee may treat this change as a termination of their contract and resign, subsequently claiming damages for wrongful dismissal.

2. Termination With Cause (Just Cause)

Termination with cause, often referred to as Just Cause termination, represents the most severe sanction in employment law.

• High Legal Threshold: For an employer to legally justify a dismissal for cause, the employee's misconduct must be so egregious that it fundamentally and irreparably severs the employment relationship, rendering continued employment impossible. The burden of proof rests entirely on the employer, and the legal standard is exceptionally high, earning it the moniker, the "capital punishment of employment law."

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• Forfeiture of Notice: If just cause is successfully proven, the employee forfeits all entitlement to Termination Notice/Pay and Severance Pay under both the ESA and common law. This financial consequence is why the standard is so rigorously applied by courts.

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• Proportionality and Context: Courts evaluate alleged misconduct based on the principle of proportionality. The penalty (termination) must be commensurate with the gravity of the misconduct, considering the employee's role, length of service, disciplinary history, and the context of the incident. For instance, a single act of minor negligence is rarely sufficient to justify dismissal for cause.

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• Progressive Discipline: In cases involving poor performance, minor misconduct, or negligence, an employer is typically required to demonstrate a history of progressive discipline (e.g., verbal warnings, written warnings, suspension) that clearly alerted the employee to the performance deficiency and allowed a reasonable opportunity for correction, prior to imposing the final sanction of termination. The absence of documented progressive discipline significantly undermines a claim for just cause in all but the most serious cases of misconduct.

Dual Entitlement Regimes: Statutory vs. Common Law Notice

When an employee is terminated without cause, their compensation is calculated under a system featuring mandatory minimums and the potential for a higher common law standard.

I. The Employment Standards Act, 2000 (ESA) – Statutory Minimums

The ESA sets the legally enforceable minimum rights. Employees cannot contract out of, or agree to receive less than, these minimums.

A. Statutory Termination Notice/Pay in Lieu

An employee who has completed at least three months of continuous employment is entitled to either working notice or pay in lieu of notice. The entitlement is determined solely by the employee's length of service, up to a maximum of 8 weeks. 

Calculation: Termination pay is calculated based on the employee's regular wage for a regular work week, including all regular wages, commissions, and bonuses earned in the 12-week period preceding the termination date or the date notice was given.

B. Statutory Severance Pay

Severance pay is a separate and additional entitlement to termination pay, intended to compensate long-service employees for the loss of seniority and security. An employee is only entitled to ESA severance pay if both of the following criteria are met:

1. The employee has been employed for five years or more.

2. The employer has a global payroll of $2.5 million or more, OR 50 or more employees are terminated within a six-month period due to a permanent discontinuance of a part of the business.

Calculation: One week's regular wages for every completed year of service, up to a maximum of 26 weeks.

II. Common Law Reasonable Notice

The common law right to reasonable notice is the dominant factor in wrongful dismissal claims and almost always exceeds the ESA minimums.

• The Rationale: This entitlement is based on the implied term in all employment contracts (unless explicitly and validly limited by a written termination clause) that an employer must provide sufficient notice to allow the employee a reasonable period to secure comparable new employment.

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• The Bardal Factors: The duration of the reasonable notice period is determined by a contextual analysis established in the landmark case Bardal v. The Globe & Mail Ltd., which remains the leading judicial test. The core factors are:

• 1. Character of Employment: The nature of the role, its responsibilities, and the level of seniority. Historically, managerial and specialized employees received longer notice periods, though the importance of this factor has somewhat declined in recent jurisprudence.

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  3. Length of Service (Tenure): Longer-serving employees are entitled to significantly longer notice periods, reflecting their accumulated investment and loyalty.

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  5. Age of the Employee: Older employees are often awarded longer notice periods, as courts recognize that re-employment becomes increasingly difficult after the age of 45-50.

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  7. Availability of Similar Employment: The probability of the employee securing a comparable position, considering their training, qualifications, and the current economic conditions and job market within their specific industry or geographic region.

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• The Upper Limit: While there is no rigid ceiling, courts generally impose an upper limit of 24 months of notice, with periods exceeding this limit being reserved for only the most exceptional circumstances (particularly for senior management or c-suite employees with lengthy service and other factors).

Wrongful Dismissal and the Duty to Mitigate

When a termination without cause occurs, and the employer offers a compensation package that is less than the employee is entitled to under Common Law Reasonable Notice, the employee has been wrongfully dismissed.

1. The Wrongful Dismissal Claim

The claim for wrongful dismissal is a civil action seeking damages equivalent to the lost compensation and benefits the employee would have received during the full common law notice period. The damages are typically calculated as salary, bonuses, benefits, and pension contributions that would have accrued during the determined notice period.

2. The Duty to Mitigate Damages

A fundamental principle underlying the assessment of damages in wrongful dismissal is the employee's Duty to Mitigate.

• The Obligation: The employee has a positive legal obligation to take all reasonable steps to find comparable alternative employment during the common law notice period. The employee is not required to accept a substantially inferior role (e.g., a massive pay cut or demotion in status).

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• Burden of Proof: The employer bears the burden of proving that the employee failed to mitigate. This requires the employer to prove two key elements: (1) that the employee did not take reasonable steps to search for new employment, and (2) that comparable employment was actually available that the employee could have obtained had reasonable efforts been made.

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• The Offset: If the employee secures new employment during the notice period, the income earned from that new source is typically deducted from the damages awarded against the former employer (the former employer's liability is reduced by the new income). This ensures the employee does not receive a "double recovery" (i.e., full pay from the former employer and full pay from the new employer for the same period).

Protections Against Discrimination and Reprisal

Beyond wrongful dismissal, an employee may have further claims if the termination was motivated by discrimination or retaliation.

1. The Ontario Human Rights Code (OHRC)

The OHRC protects employees from discrimination and harassment based on 17 protected grounds (e.g., age, disability, race, sex, gender identity, family status, creed).

• Prohibited Ground Termination: A termination is illegal if it is based, even in part, on one or more protected grounds. For instance, terminating an employee due to an impending maternity leave (sex) or because of a mental health condition (disability) is unlawful.

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• Remedies: Claims under the OHRC are typically pursued through the Human Rights Tribunal of Ontario (HRTO). Unlike a wrongful dismissal claim, which primarily targets lost wages, the HRTO can award damages for injury to dignity, feelings, and self-respect in addition to monetary damages for lost wages. The limitation period for filing an HRTO claim is one year from the date of the last alleged discriminatory act.

2. Reprisal Under the ESA and OHRC

A Reprisal is an adverse action taken by an employer in retaliation against an employee for exercising a legal right.

• ESA Reprisal: The ESA prohibits an employer from penalizing or threatening to penalize an employee for asserting their rights under the Act. Examples include asking about pay equity, inquiring about overtime pay, filing an ESA complaint, or taking a protected statutory leave (e.g., family caregiver leave). If a termination is found to be a reprisal, the ESA allows for remedies such as reinstatement (giving the job back) and compensation for lost wages.

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• OHRC Reprisal: The OHRC specifically prohibits reprisal against an individual who has made a complaint, sought to enforce a right, or participated in an investigation under the Code.

In both instances, the employee's legal protections are activated not by the merits of the underlying complaint, but by the act of having attempted to enforce or exercise the protected right.

The moment an employee is presented with a termination package in Ontario, they are entering a crucial, often high-stakes, legal negotiation. The document presented is an offer, designed by the employer to minimize their legal liability, and should never be signed immediately. The employee's primary objective must be to move from the employer's offer, which is typically rooted in statutory minimums, to their full entitlement under common law.

This comprehensive guide details the key components of a termination package, the legal rights that govern its evaluation, and the essential considerations before a final agreement is reached.

I. Understanding Your Dual Entitlements: ESA vs. Common Law

The first step in evaluating any termination package is understanding the two legal standards that govern your entitlements in Ontario: the Employment Standards Act, 2000 (ESA) and the Common Law of Wrongful Dismissal.

A. The Employment Standards Act, 2000 (ESA) – The Statutory Floor

The ESA sets the minimum, non-negotiable standards for termination pay (notice in lieu) and, for certain employees, severance pay. Every termination package must, at minimum, meet these entitlements.

1. Statutory Termination Pay (Notice in Lieu):

2. • This is based purely on the employee's length of continuous service (from three months to eight years or more) and provides one week of pay for every completed year of service, up to a maximum of eight weeks.

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   • This amount must be paid regardless of whether the employee signs any release or agreement.

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3. Statutory Severance Pay:

4. • This is an additional payment, separate from termination pay, intended to compensate long-service employees for the loss of accumulated seniority.

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   • It only applies if the employee has five or more years of service AND the employer has a global payroll of $2.5 million or more or is carrying out a mass termination (50 or more employees) within a six-month period.

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   • The calculation is one week's regular wages for every completed year of service, plus a pro-rated amount for any partial year, up to a maximum of 26 weeks.

B. The Common Law – The Standard of Reasonable Notice

If an employment contract does not contain a valid and enforceable termination clause (as detailed below), the employee is entitled to compensation determined by the Common Law of Wrongful Dismissal. This is the amount of pay and benefits required to provide Reasonable Notice—the time a court deems necessary for the employee to secure comparable replacement employment.

• The Bardal Factors: Common law reasonable notice is determined by a contextual analysis of the employee's unique circumstances:10

• 1. Age: Older employees (typically 45+) are generally awarded longer notice periods.

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  3. Length of Service: Longer tenure yields greater notice.

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  5. Character of Employment: Senior, managerial, and specialized roles often command more notice due to the specialized job search required.

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  7. Availability of Similar Employment: The state of the job market in the employee's field and region.

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• Quantum of Damages: Common law notice often ranges from a few months up to a maximum of 24 months of compensation, making it substantially higher than the ESA minimums (which max out at 8 weeks of termination pay + 26 weeks of severance pay, assuming eligibility for both). A termination package should be evaluated against this potentially much higher common law standard.

II. The Critical Role of the Termination Clause

The most decisive factor in determining an employee's entitlement is the Termination Clause found in the original employment contract.

A. The Purpose of the Termination Clause

A termination clause is a specific provision intended to contract out of the higher common law right to reasonable notice, limiting the employee's entitlement to only the statutory minimums under the ESA. For an employer to successfully rely on such a clause, it must be unambiguous and perfectly compliant with the ESA.

B. Strict Judicial Scrutiny (The Test for Validity)

Ontario courts apply extremely rigorous scrutiny to termination clauses due to the inherent power imbalance between employers and employees. A clause will be deemed void and unenforceable if any part of it, now or potentially in the future, violates or attempts to diminish the ESA's minimum rights. If a clause is found to be unenforceable, then an employee's rights default to the common law standard.

Common Grounds for Invalidating a Termination Clause:

• Failure to Provide for All ESA Minimums: The clause must explicitly account for all minimum entitlements, including termination pay, the continuation of benefits for the notice period, and, critically, statutory severance pay for employees who may one day become eligible (i.e., pass the five-year mark), even if they have not reached that threshold at the time of signing the contract.

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• Ambiguity: Any lack of clarity or inconsistent wording will be interpreted in favour of the employee (contra proferentem), often leading to the clause being struck down.

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• Attempting to Lower the Just Cause Standard: If the clause defines "just cause" (for termination without any notice) more broadly than the ESA's standard of "wilful misconduct," it will likely be deemed invalid, contaminating the entire termination provision (including the "without cause" component).

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• Failure to Cover All Compensation: The clause must clearly state that all forms of compensation (including salary, benefits, and sometimes bonuses/pension contributions) will be continued or paid out for the statutory notice period.

Conclusion: Before accepting any package, a primary consideration is the enforceability of the contract's original termination clause. This determination is complex and necessitates legal review.

III. The Law of Releases and the Pressure to Sign

A fundamental element of virtually every employer-offered termination package is the Full and Final Release.

A. What is a Full and Final Release?

The Release is a legally binding contract in which the employee agrees to waive, or give up, any and all existing or future legal claims against the employer, its directors, officers, and agents, in exchange for the compensation outlined in the termination package.

• Waiver of Claims: By signing, the employee gives up the right to sue for wrongful dismissal (common law notice), human rights violations (e.g., discrimination or harassment), unpaid wages, or any other claim related to their employment or termination.

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• Consideration: For the Release to be a valid contract, the employee must receive something of value in return, known as consideration. Compensation equal only to the ESA minimums is generally considered insufficient consideration for signing a Release, as the employer is legally obligated to pay those amounts regardless. Therefore, any compensation offered above the ESA minimums serves as the consideration for the waiver of the employee's common law rights.

B. Extending Deadlines for Signing the Package

Employers frequently present packages with extremely short deadlines (e.g., 24, 48, or 72 hours) to create a sense of urgency and pressure the employee into signing without seeking independent legal advice.

• Legal Standing: The employee is not legally required to sign immediately. The employer cannot withhold the minimum ESA entitlements (Termination Pay, Severance Pay, and accrued vacation pay) simply because the employee refuses to sign a Release.

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• Statutory Limitation Period: The employee has a two-year limitation period from the date of termination to commence a legal claim for wrongful dismissal in court. The short deadline imposed by the employer is a tactic, not a legal requirement.

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• Action Required: If faced with a tight deadline, the employee should immediately and in writing request a reasonable extension (typically one to two weeks) to seek independent legal counsel to review the offer. Refusal to grant a reasonable extension, combined with an unfairly low offer, can sometimes be cited in court as evidence of bad faith bargaining.

IV. Evaluating the Termination Package: Beyond the Base Salary

A proper evaluation of the package must account for the full value of the lost compensation, not just base salary.

A. Components to Scrutinize:

• Continuation of Benefits: The package must specify how long health, dental, and life insurance benefits will be continued. Loss of benefits is a major financial consequence. Common law damages include the cost of replacing these benefits for the entire notice period, or the cost of the premiums the employer would have paid.

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• Incentive Compensation: If the employee received bonuses (discretionary or non-discretionary), commissions, or stock options/RSUs/PSUs, the package must compensate for the loss of these entitlements during the entire common law notice period. Clauses in compensation plans that attempt to eliminate these payments upon termination are often challenged in court.

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• Pension Contributions: The employer must account for the contributions it would have made to the employee's Registered Pension Plan (RPP) or Registered Retirement Savings Plan (RRSP) for the duration of the notice period.

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• Tax Considerations: Payments that are a continuation of salary are subject to regular payroll deductions (source withholdings). Lump-sum payments of severance may have a higher lump-sum tax withholding rate applied at the source, though the actual tax liability is reconciled when the employee files their annual return.

B. Negotiation Strategy

The ultimate goal of negotiation is to secure a settlement that approximates the employee's full common law entitlement, ensuring the employee receives the highest possible compensation in exchange for signing the Full and Final Release.

V. Accessing Employment Insurance (EI)

A severance package directly impacts the timing of an employee's entitlement to Employment Insurance (EI) benefits.

• Severance as Earnings: Under the Employment Insurance Act, all termination payments (including statutory and common law notice, severance pay, and vacation pay) are considered earnings arising out of employment.

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• The Allocation Period (The Delay): Service Canada is required to allocate these earnings over a period equivalent to the employee's normal weekly earnings. This "allocation period" delays the start of the employee's EI benefits and the commencement of the one-week waiting period.

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• • Example: If an employee’s normal weekly pay is $2,000 and the total severance package (excluding ESA minimums and vacation pay) is $20,000, Service Canada will allocate these earnings over 10 weeks ($20,000 / $2,000 per week = 10 weeks). EI benefits will not commence until the end of that 10-week period.

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• Application Timing: Employees are advised to apply for EI immediately upon termination, regardless of the severance package, as the application date can impact eligibility. Service Canada will calculate the allocation period based on the information provided by the employer via the Record of Employment (ROE).

Summary of Key Considerations

In conclusion, a termination package is may be the opening stage of a negotiation. The employee's primary power lies in their right to a common law  determination of reasonable notice. Understanding the critical defects that can invalidate a contractual termination clause is an important step in maximizing the final settlement.