HR glossary · Ending employment and discipline

Severance pay

Severance pay is extra money owed on termination under Ontario and federal law, on top of notice. Elsewhere the word usually means termination pay.

Also called: statutory severance, severance package

What severance pay means

In everyday speech, "severance" means any money paid when a job ends. In Canadian employment law it has a narrower meaning. Statutory severance pay is a separate payment, on top of termination notice or pay in lieu, that compensates longer-service employees for losing their job and the seniority that went with it.

Ontario's Employment Standards Act and the Canada Labour Code, for federally regulated employers, both have it. If you are elsewhere, what people call a severance package is usually termination pay plus any common-law notice, often offered in exchange for a signed release.

How it works

Ontario severance pay applies when an employee with 5 or more years of employment is terminated and the employer either has a payroll of $2.5 million or more, or severs 50 or more employees in a 6-month period because all or part of the business permanently closes. Ontario now measures the $2.5 million against the employer's global payroll, not only Ontario payroll, following a 2021 court decision. Service counts whether it was active or inactive.

The Ontario amount is the employee's regular weekly wage times completed years of service, plus completed months divided by 12, to a maximum of 26 weeks. So an employee with 7 years and 6 months gets 7.5 weeks. Severance can also be triggered by a long layoff, for example 35 weeks in a 52-week period.

Federal severance pay applies to an employee with at least 12 consecutive months of continuous employment whose employment is terminated, unless they are dismissed for just cause. The amount is the greater of 2 days' wages at the regular rate for each completed year of service, or 5 days' wages.

Neither form of severance replaces notice. You owe both. Common mistakes are assuming a small business is exempt in Ontario without checking global payroll, forgetting partial years in the Ontario formula, and folding severance into pay in lieu without showing each amount separately.

Severance pay by province

Separate statutory severance pay exists in Ontario and for federally regulated employers.

Where the work is done	The rule
Federal	After 12 consecutive months of continuous employment, the greater of 2 days' regular wages per completed year or 5 days' wages. Not owed on dismissal for just cause.
Ontario	After 5 years, if the employer has a global payroll of $2.5 million or more, or severs 50 or more employees in 6 months due to a permanent closure of all or part of the business. 1 week's regular wages per year of service, with partial years by completed months, to 26 weeks.

In other provinces, ask your provincial employment standards office; the everyday word "severance" there usually means termination pay or common-law notice.

Example: A Hamilton machine shop with a large parent company

Ken manages a 15-person machine shop in Hamilton owned by a US company. He ends the job of a machinist with 6 years and 4 months of service, paid $1,200.00 a week. Ontario payroll alone is under $2.5 million, but the parent company's global payroll is well above it.

Ken owes 6 weeks' termination notice or pay, and severance pay of $1,200.00 x (6 + 4/12) = $7,600.00. He lists the two amounts separately in the termination letter.

Hollis handles the exit checklist

Hollis's exit checklist lists what is owed when someone leaves in your province, including final pay timing and vacation pay, so severance and notice are not confused.

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Employment standards: termination notice by province

Questions about severance pay

Is severance pay mandatory in Canada?

Statutory severance pay is required in Ontario (when the thresholds are met) and for federally regulated employers after 12 months. In other provinces, what is owed on termination is notice or pay in lieu, plus any common-law notice.

How is Ontario severance pay calculated?

Regular weekly wages times completed years of service plus completed months divided by 12, up to 26 weeks. It applies only after 5 years of service and when the payroll or closure threshold is met.

Is severance pay the same as pay in lieu of notice?

No. Pay in lieu replaces the notice period. Severance pay is an extra amount on top of it.

Official sources

General information for Canadian employers, not legal advice. Rules differ by province and territory and change over time, so check with your provincial employment standards office (or the federal Labour Program if you are federally regulated) before you rely on it. See employment standards by province.

Checked against official sources on 4 November 2026.