When you are dismissed from work, your employer may hand you a letter that references severance pay, termination pay, and pay in lieu of notice, also referred to as wages in lieu of notice, sometimes all in the same paragraph. These are not different names for the same thing. These are distinct legal entitlements with different eligibility rules and calculations. That can make it difficult to tell whether your employer has met their legal obligations.
Is Severance Pay Different from Pay in Lieu of Notice?
Yes. Clearly and meaningfully so.
One practical way to think about the difference is that pay in lieu of notice is tied to the loss of your job and the time it should reasonably take to replace it. Severance pay, by contrast, recognizes the length of your service with that employer. They address different aspects of the employment relationship, which is why both can be owed at the same time.
Pay in lieu of notice compensates you for the notice period you were entitled to but you do not work because your employer chooses to dismiss you early. Severance pay compensates you for years of service, and only applies if you meet specific eligibility criteria. They have separate legal bases under the Employment Standards Act (ESA) and are owed independently of each other.
The confusion is common because many employers use the word “severance” loosely to describe any payment made at termination. A lump sum labelled “severance” in a termination letter may be combining several distinct obligations without separating them. That lack of clarity can make it harder to tell whether your employer has met their legal obligations. If your termination package does not break down what each payment represents, that is worth examining carefully before you sign anything, especially with proper guidance on a termination package review.
What Is Pay in Lieu of Notice?
When an employer terminates an employee without cause, they are required to provide advance notice that the job is ending. This gives the employee time to find new work. Most employers do not want a departing employee working through that period, so they pay the equivalent wages instead. That payment is called pay in lieu of notice, or wages in lieu of notice. The terms mean the same thing.
Under the ESA, the minimum notice period depends on length of service, starting at one week for employees with three months to one year of service and scaling up to a maximum of eight weeks for those with eight or more years. These are statutory minimums. They are the floor, not the ceiling.
It is also important to know that notice can be provided in two ways. An employer can require you to work through the notice period, which is called working notice, or they can provide pay in lieu instead. Most employers choose the former, particularly in roles where continued access to systems, clients, or confidential information is a concern.
Common law often entitles employees to considerably more notice than what an employer provides to dismissed employees.
Courts, in determining an employee’s entitlement to notice, assess what is called reasonable notice using the so-called “Bardal” factors which include length of service, age, the nature of the position, and the availability of comparable employment.
Under the Bardal factors, a long-tenured employee in a senior or specialized role may be entitled to a notice period well beyond what the ESA provides. Pay in lieu of notice at common law covers the full reasonable notice period.
What Is Severance Pay?
Severance pay is a separate entitlement from notice of dismissal under the ESA. It is not a substitute for notice, and does not apply to every dismissed employee.
To qualify for severance pay, an employee must have at least five years of service with the employer and the employer must either have a payroll of at least $2.5 million or be conducting a mass layoff affecting 50 or more employees within a six-month period. Where these conditions are satisfied, eligible employees are entitled to one week of severance pay per year of service, up to a maximum of 26 weeks.
Severance pay is not discretionary. If you meet the threshold, your employer is legally required to pay it. Employees who are not aware of this sometimes accept packages that omit it entirely, or accept a combined lump sum without knowing whether severance pay was included. Distinguishing between notice (or pay in lieu of notice) and severance matters because many employees assume that any payment received at termination is “severance.” Employees can often, understandably, confuse termination pay with severance pay. To avoid this, it is worth keeping in mind that, in Ontario, severance, notice (or pay in lieu of notice), and common law notice, are three distinct but interrelated parts in determining what an employee is legally entitled to when dismissed from employment.
Do You Get Both Severance Pay and Pay in Lieu of Notice?
Yes, if you qualify for both. They address different obligations, so receiving one does not reduce or replace the other.
Under the ESA, an eligible employee is entitled to termination pay in lieu of notice and severance pay as separate, cumulative amounts. An employer cannot fold both into a single unlabelled payment and claim they have satisfied each obligation. If they do, the package may not meet the ESA minimum.
Specifically, regardless of what an employee is entitled to under common law, they cannot be legally denied statutory amounts owing under the ESA.
It is therefore important for employees to be able to identify and attribute any amounts provided under a package as between common law and statutory payments relating to notice (or pay in lieu of notice) and severance, if applicable.
How Is Severance Pay Calculated?
The ESA states that employees are entitled to severance pay equal to one week of ‘regular’ wages per year of employment, plus a prorated amount for any partial year, up to a maximum of 26 weeks.
If you want a rough estimate of what that might look like in your situation, a severance pay calculator can provide a helpful starting point. Regular wages under the ESA include base pay, not commissions or overtime, though this depends on how compensation is structured.
Reasonable notice under the common law does not follow a quantitative formula. Rather, courts, in determining reasonable notice, use the “Bardal” factors too. This means that two people dismissed on the same day from the same employer may be entitled at law to different amounts depending on a court’s assessment as to what is sufficient to support them in finding alternative employment considering relevant factors such as their age, seniority, and the circumstances of the labour market for the individual’s skills and area of work.
The variability of common law notice is one reason that dismissed employees should consider having their termination package reviewed before deciding whether to accept the amount offered.
While employers are required to provide dismissed employees with at least the ESA minimum amount, many do not offer anything beyond this amount.
For this reason, common law entitlements are often one of the most important issues that employees should consider having reviewed with qualified counsel.
Dismissed employees in Ontario usually have two years from the date of termination to bring a wrongful dismissal claim. Many employer offers are time-limited and include a requirement for an employer to sign a release which, when executed, will, in most cases, end an employee’s right to sue an employer in relation to any legal issue (not just termination pay) relating to an employee’s employment with the employer. For these reasons we believe that employees should consider securing counsel sooner than later.
Legal Disclaimer: This post is general information only. Nothing in it constitutes legal advice, and nothing here applies to your specific situation. Every case turns on its own facts, and the only way we can advise you on yours is through a proper consultation and engagement. Reading this post does not create a lawyer-client relationship with Sultan Lawyers. If you have questions about your situation, contact us directly.
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