How Much Severance Do I Have to Pay?

By Shelley Brown, CHRE, FHRPA

Understanding severance pay is an important part of managing employment relationships in Ontario. Many employers and employees alike are uncertain about what a severance package includes, how much must be paid, and when the obligation arises. Ontario has specific severance pay laws under the Employment Standards Act (ESA) that set out who qualifies, how payments are calculated, and the differences between severance pay and termination pay.

In this blog, we’ll discuss:

What is severance pay?
Severance vs termination pay
What are the rules around severance pay?
Do I need to only pay 2 weeks of severance?
How do I calculate severance pay?

What is severance pay?

Severance pay is compensation paid by employers. It is given to some, not all, employees who are entitled to it when their job ends through no fault of their own. It is a recognition of the employee’s long service and is meant to help them transition financially after losing their job.

Think of severance pay as a “thank you” for service to the organization. The amount of severance pay companies offer is based on two factors. They are the length of service and regular weekly wages. Severance caps out at a maximum of 26 weeks’ pay. Not every employee is entitled to severance, and not all employers are required to provide severance.

Many people confuse termination pay (or notice) with severance pay. Severance pay is not the same as termination pay, and there are different rules that apply to each form of payment.

Severance vs. termination pay

Severance and termination pay are two different types of compensation employers give to employees. Termination pay (or notice of termination) is a separate type of payment that may also be required when there is a lack of advance notice when an employee is terminated. An employee could receive both termination pay and severance pay, depending on the circumstances.

Here is a comparison of how severance pay and termination pay work in Ontario:

	Termination Pay	Severance Pay
Purpose	Compensation for lack of advance notice when employment ends.	Compensation for long service and loss of seniority/loyalty when employment ends.
When It Applies	If an employer does not provide the required notice of termination.	If the employee has 5+ years of service and the employer has a payroll of $2.5M+, or lays off 50+ employees in 6 months due to a closure.
Employee Service	No minimum service required (all employees covered by ESA are eligible).	Employee must have at least 5 years of service.
Employer Size	Applies to all employers, regardless of payroll.	Applies only if the employer has $2.5M+ payroll or mass termination.
Formula	1 week of wages per year of service, up to a maximum of 8 weeks.	1 week of wages per year of service (plus pro-rated months), up to 26 weeks.
Maximum Amount	8 weeks’ wages.	26 weeks’ wages.
Example	Employee earns $1,000/week, worked 4 years → Termination pay = 4 × $1,000 = $4,000.	Employee earns $1,000/week, worked 10 years → Severance pay = 10 × $1,000 = $10,000.

What are the rules around severance pay?

The Government of Ontario outlines clear severance pay laws in Ontario. Severance pay rules are governed by the Employment Standards Act, 2000 (ESA). These laws outline when severance must be paid, who qualifies, and how it is calculated. Here is how it works:

“A person's employment is 'severed' when their employer:

Dismisses or stops employing the employee, including where an employee is no longer employed due to the bankruptcy or insolvency of their employer;
"Constructively" dismisses (please refer to "constructive dismissal") the employee, and the employee resigns in response within a reasonable time;
Lays the employee off for 35 or more weeks in a period of 52 consecutive weeks;
Lays the employee off because all of the business at an establishment closes permanently (an "establishment" can, in some circumstances, include more than one location); or
Fives the employee written notice of termination and the employee resigns after giving two weeks' written notice, and the resignation takes effect during the statutory notice period.”

When does severance pay apply?

Three criteria must be present for severance pay to apply. An employee is entitled to severance pay if:

They have worked for the employer for five or more years, and
The employer has a total payroll in Ontario of $2.5 million or more, or
The employer has permanently laid off 50 or more employees within six months due to all or part of the business closing.

Who qualifies for severance pay?

Both full-time and part-time employees can qualify for severance pay if they have been with an employer for more than five years and the employer has a payroll of greater than $2.5 million. Employees dismissed for willful misconduct, disobedience, or neglect of duty are not entitled.

Do I need to only pay 2 weeks of severance?

There is no “2-week rule” for severance pay in Ontario. This is a common misconception. Employers are not limited to paying just 2 weeks. You may need to pay more severance. What you owe depends on the employee’s years of service, your company’s payroll size, and whether the employee qualifies under Ontario’s Employment Standards Act.

How do I calculate severance pay?

There is a specific formula used for employers to calculate severance payouts:

Severance Pay = (Regular Weekly Wages) × (Years of Service + Pro-rated Months)

For example, an employee earns $2,000/week, worked 10 years → Severance pay = 10 × $2,000 = $20,000.

How it works:

Regular weekly wages: Use the employee’s average regular wages (excluding overtime, vacation pay, or bonuses) for a standard workweek.
Years of service: Count the total number of full years of employment with the company.
Pro-rated months: If the employee worked at least five years, include partial years by converting months into a decimal. For example, 6 months equals 0.5 of a year.

A final word about severance pay obligations

Understanding severance pay, the rules surrounding a severance package, and Ontario’s severance pay laws is essential for both employers and employees. By knowing the difference between termination pay and severance pay, recognizing when severance is required, and applying the correct formula, employers can stay compliant while supporting employees through a fair transition.

Unsure about your obligations? Consult our HR services professionals. We can help you with all your Payroll and benefits service needs.

Author Shelley Brown, CHRE, FHRPA is a HR veteran and lead trainer of AugmentHR’s soft skills training program. Shelley was granted the Human Resources Professional Association Fellow Award in recognition of her 30 year career both leading functions in multi-nationals and coaching businesses as a sought-after HR consultant.