Severance Pay in Ontario (2026): Who Qualifies, How Much and How It Differs From Common-Law Severance

"Severance" means two different things in Ontario. In the Employment Standards Act it is a specific, capped payment for long-service employees at larger employers: one week's pay per year of service, up to 26 weeks. In everyday use — and in lawyers' letters — a "severance package" often means the much larger common-law notice a court might award. Mixing the two up leads employers to underpay and employees to under- or over-estimate what they're owed. This guide is for Ontario employers, HR and payroll staff and employees in 2026. It explains who qualifies for ESA severance pay, how to calculate it with worked examples in Canadian dollars, the exemptions, how it's paid and taxed, and how it fits alongside termination pay and common-law notice.

Quick answer

Ontario ESA severance pay is owed when employment is severed and the employee has 5 years or more of service, and the employer has a global payroll of C$2.5 million or more — or 50 or more employees in 6 months lose their jobs in a permanent closure. It's one week's regular wages per year of service, with partial years pro-rated by month, up to 26 weeks. It's on top of termination pay.

• Payroll test is global — staff outside Ontario count

• All service counts, continuous or not, active or not

• Due by the later of 7 days or the next pay day; instalments up to 3 years only with agreement or approval

• Taxed as a retiring allowance — income tax, but no CPP or EI

• Common-law notice can be far larger unless a valid contract clause limits it

When employment is "severed"

Severance pay is triggered by a severance of employment, which is wider than a dismissal. Under Ontario's ESA guide, employment is severed when:

• the employer dismisses the employee or otherwise refuses or is unable to continue employing them — including because of the employer's bankruptcy or insolvency
• the employee resigns within a reasonable time after a constructive dismissal, such as a major unilateral pay cut or demotion
• the employee is laid off for 35 weeks or more in any 52 consecutive weeks (the weeks need not be consecutive), or laid off beyond the end of an approved extended temporary layoff
• the employer permanently discontinues all of its business at an establishment and the employee is laid off as a result
• the employee resigns on at least two weeks' written notice, effective during the statutory notice period, after the employer has given them notice of termination

For severance purposes, a week of layoff is one in which the employee earns less than a quarter of their regular weekly wages — a different threshold from the "less than half" used for termination pay. Weeks when the employee isn't able or available to work, is suspended for discipline, or isn't working because of a strike or lockout don't count.

The last trigger protects employees who find a new job while working out their notice. If they resign on two weeks' written notice and leave before the end of the notice period, they still receive severance as if they'd stayed.

Who qualifies: the two tests

An employee qualifies if both conditions are met.

1. Five years of employment. The employee must have been employed for at least 5 years. Unlike many service-based rules, this counts all time with the employer, whether continuous or not and whether actively working or not. Time on leave, time on layoff and earlier stints with the same employer all count. A warehouse worker who worked three years, left, and came back for two and a half more has five and a half years for severance purposes.

2. The employer's size — or a closure. Either:

• the employer has a global payroll of C$2.5 million or more, or
• the severance is one of 50 or more employees in 6 months severed because all or part of the employer's business permanently closed.

The payroll test is where small and mid-sized businesses most often get it wrong. Ontario's guide refers to the employer's global payroll: it isn't limited to Ontario. A software company with 12 staff in Ottawa and 150 in the United States is likely over the threshold, even though its Ontario payroll is under C$1.5 million. On the other hand, a single-location Ontario restaurant with 25 staff on an average of C$40,000 has a payroll of about C$1 million and won't meet it — unless it closes and 50 or more people lose their jobs in six months.

How much: the severance pay formula

ESA severance pay is:

regular wages for a regular work week × (completed years of employment + completed months of the incomplete year ÷ 12), up to a maximum of 26 weeks.

A few rules shape the inputs. "Regular wages" means the employee's normal pay for a normal week, not including overtime. For someone whose pay isn't based on time worked — a commissioned salesperson, for example — a regular week's wages is the average of their weekly earnings over the last 12 weeks of employment in which they worked. Any statutory notice period counts toward service, whether the employee worked it or was paid termination pay in place of it. Only completed months count toward the partial year; days left over are ignored.

Calculating ESA severance pay

1. 1

   Confirm severance applies

   Employment severed, 5 or more years of total service, and C$2.5M global payroll or a qualifying closure.

2. 2

   Work out a regular week's wages

   Hourly rate × regular hours, or weekly salary. Commission or irregular pay: average of the weeks worked in the last 12 weeks.

3. 3

   Count service in years and months

   Include all service and the statutory notice period. Convert leftover completed months to a fraction (months ÷ 12).

4. 4

   Multiply and cap

   Weekly wages × years (with fraction). Cap the result at 26 weeks' wages.

5. 5

   Pay or agree instalments

   Pay by the later of 7 days after severance or the next pay day — or set up instalments over up to 3 years with written agreement or the Director's approval.

Worked examples

Hourly (Ontario's example). Susan works 40 hours a week at C$25, so her regular week is C$1,000. She has 7 years and 9 completed months of service: 7 + 9/12 = 7.75. Her severance pay is C$1,000 × 7.75 = C$7,750.

Pay in lieu of notice counts (Ontario's example). Alex earns C$1,000 a week and has 10 years' service. He's given 8 weeks of termination pay instead of notice; that notice period adds about 2 months, so his service is about 10.17 years. Severance: C$1,000 × 10.17 = C$10,170.

Commission (Ontario's example). Kwesi is paid by commission and earned C$7,723 in the 12 weeks he worked before termination: C$7,723 ÷ 12 = C$643.58 a week. With 9 years and 6 months' service (9.5), his severance is C$643.58 × 9.5 = C$6,114.01.

The 26-week cap. A plant supervisor in Hamilton earns C$1,500 a week and has 31 years' service. The formula would give 31 weeks, but the cap limits it to 26: 26 × C$1,500 = C$39,000 in severance. She's also owed the 8-week maximum termination pay — C$12,000 plus vacation pay — so her ESA total is over C$51,000 before any common-law claim.

Severance plus termination pay. Priya, a Mississauga office manager on C$1,200 a week with 11 years' service at a company with a C$6 million payroll, gets 8 weeks' termination pay (C$9,600 plus 6% vacation pay of C$576) and 11 weeks' severance (C$13,200). Her ESA minimum is C$23,376 in total.

Termination pay vs severance pay under Ontario's ESA

	Termination pay	Severance pay
Purpose	Replaces notice not given	Compensates for loss of a long-service job
Service needed	3 months	5 years
Employer test	None	C$2.5 million global payroll, or 50+ in a closure
Amount	1 to 8 weeks by service	1 week per year, up to 26 weeks
Working notice instead?	Yes	No — always paid
Tax treatment	Employment income (CPP, EI, tax)	Retiring allowance (tax only)

Purpose

Termination pay

Replaces notice not given

Severance pay

Compensates for loss of a long-service job

Service needed

Termination pay

3 months

Severance pay

5 years

Employer test

Termination pay

None

Severance pay

C$2.5 million global payroll, or 50+ in a closure

Amount

Termination pay

1 to 8 weeks by service

Severance pay

1 week per year, up to 26 weeks

Working notice instead?

Termination pay

Yes

Severance pay

No — always paid

Tax treatment

Termination pay

Employment income (CPP, EI, tax)

Severance pay

Retiring allowance (tax only)

Who isn't entitled to severance pay

Even when the service and payroll tests are met, an employee isn't entitled to ESA severance pay if they:

• refused an offer of reasonable alternative employment with the employer, or refused to exercise seniority rights to get one
• retired on a full pension that recognizes all the years of service they would have earned had they stayed (a CPP pension doesn't count)
• lost their job because a permanent closure was caused by the economic effects of a strike
• work in construction, including off-site staff commonly associated with site employees, or in on-site maintenance of buildings, roads, sewers, pipelines, tunnels and similar works
• were guilty of wilful misconduct, disobedience or wilful neglect of duty that isn't trivial and hasn't been condoned
• had a contract that became impossible to perform or frustrated by an unforeseeable event — but not where the cause was the employer's bankruptcy or insolvency, the employee's own illness or injury, or the refusal or revocation of a temporary help agency or recruiter licence

The illness exception is important. An employee who has been off on long-term disability for years and whose job is then ended generally isn't excluded on frustration grounds, so their full service still counts toward severance.

Paying severance: deadlines, instalments and recall rights

Severance pay is due on the later of seven days after the employment is severed or the employee's next regular pay day — the same deadline as termination pay.

An employer that can't pay a large amount at once can pay in instalments over up to 3 years, but only with the employee's written or electronic agreement or the approval of the Director of Employment Standards. If it misses a scheduled instalment, the whole unpaid balance becomes due immediately. Instalment plans are common in closures, where cash is tight and many employees are owed severance at the same time.

Laid-off employees with recall rights face a choice. If the layoff lasts long enough to trigger termination and severance pay, they can either keep their recall rights and wait, or give them up and take the money. The choice must be the same for termination pay and severance pay, so an employee should decide with both amounts in front of them.

ESA severance vs common-law "severance"

The ESA amounts are minimums. A non-unionized employee who is dismissed without cause is also entitled to reasonable notice at common law, unless their employment contract contains a valid clause limiting them to the ESA. Courts decide reasonable notice case by case, weighing the character of the job, length of service, age and the availability of similar work — the Bardal factors — and long-serving or senior employees can be awarded close to two years' pay. That's what most people mean by a "severance package".

The two systems overlap rather than stack in full: a common-law award is meant to cover the whole notice period, and ESA payments are generally taken into account when damages are calculated. But the ESA amounts are a floor that employers and employees can't contract out of — any package should include at least the statutory termination and severance pay.

Whether the contract clause holds matters more than any other factor. Ontario courts read termination clauses strictly. In Waksdale (2020), the Court of Appeal held that a single ESA breach anywhere in the termination provisions — even an unused "for cause" clause — voids them all. In Dufault v. Ignace (Township), the Court of Appeal in December 2024 upheld a finding that a clause was unenforceable because its for-cause provision breached the ESA, and the Supreme Court of Canada refused leave to appeal on 5 June 2025. A clause that limits an employee to "ESA minimums" therefore needs careful drafting to survive.

Key Ontario developments on severance and termination clauses

2020

Waksdale (Ont. C.A.) — one ESA breach voids all termination provisions

2022

Rahman (Ont. C.A.) follows Waksdale

19 Dec 2024

Dufault (Ont. C.A.) upholds finding that the termination clause is unenforceable

5 Jun 2025

Supreme Court of Canada refuses leave in Dufault

27 Nov 2025

Extended temporary layoffs by agreement; layoff past the approved end triggers severance

An employee also can't double-dip through two forums. They can file an ESA claim with Ontario's employment standards program for termination and severance pay, or sue for wrongful dismissal, but not both for the same termination. Because common-law notice can be many times the ESA amount, employees with long service often get legal advice before filing an ESA claim.

Tax and payroll treatment

The Canada Revenue Agency treats amounts paid on termination in recognition of long service, or as damages for loss of employment, as a retiring allowance. Withhold income tax, but don't deduct CPP contributions or EI premiums. Report it on the employee's T4 slip with code 66 (eligible) or 67 (non-eligible) — our T4 slips guide explains the codes. The CRA's retiring allowance page explains which code applies and when part of the payment can go directly to an RRSP or RPP without tax withheld.

Termination pay is different: the CRA treats wages in lieu of notice as employment income, with CPP, EI and income tax deducted. When you pay both, split them clearly on the final pay statement and the Record of Employment. See our guides to payroll deductions and the Record of Employment.

Federally regulated employers in Ontario use the Canada Labour Code instead of the ESA. Federal severance is owed after 12 consecutive months of continuous employment and equals the greater of 2 days' wages per year for each full year or 5 days' wages — a much lower figure, with no payroll test.

Common mistakes

Counting only Ontario payroll. The test is global. Check total worldwide payroll before deciding severance isn't owed.

Counting only continuous service. Rehires, leaves and layoffs all count toward five years and toward the formula.

Rounding service up. Only completed months count; 7 years, 9 months and 25 days is 7.75 years.

Offsetting severance with working notice. Severance must be paid in money. Working notice can replace termination pay but never severance pay.

Ignoring the closure test. A smaller employer under the payroll threshold still owes severance to 5-year employees if it lets 50 or more people go within six months because all or part of the business permanently closes. Count the whole six-month window, not just one round of cuts.

Withholding CPP and EI on severance. It's a retiring allowance — tax only. Over-deducting creates corrections on the T4.

Before paying Ontario severance

0/8

• Confirm a severance trigger (dismissal, constructive dismissal, 35-week layoff, closure)
• Confirm 5+ years of total service, including breaks and leaves
• Check global payroll against C$2.5M — or the 50-in-6-months closure test
• Rule out any genuine exemption (misconduct, construction, full pension, reasonable alternative work)
• Calculate weeks: years + completed months ÷ 12, capped at 26
• Pay by the later of 7 days or next pay day, or document an instalment agreement
• Withhold income tax only and report on the T4 as a retiring allowance
• Pay termination pay and vacation pay separately

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Official links

• Ontario — severance pay (ESA guide)Eligibility, formula, examples, exemptions
• Ontario — termination of employment (ESA guide)Notice and termination pay
• CRA — retiring allowancesWithholding and T4 reporting
• Federal — termination of employmentCanada Labour Code severance

What to do next

Before ending a long-service employee's job, pull their full service history and confirm your global payroll, then work out termination pay and severance pay together so you know the full ESA minimum. Read our guide to termination pay in Ontario for the notice side, have your contract's termination clause reviewed if you plan to rely on it, and use our salary slip generator to show severance, termination pay and vacation pay as separate lines.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

Who is entitled to severance pay in Ontario?

An employee whose employment is severed qualifies under the ESA if they have at least 5 years of employment and either their employer has a global payroll of C$2.5 million or more, or they are one of 50 or more employees in 6 months whose jobs end because all or part of the business permanently closes. Exceptions include wilful misconduct, construction work and refusing reasonable alternative employment.

How is severance pay calculated in Ontario?

Multiply the employee's regular wages for a regular work week by their completed years of employment, plus completed months of the final year divided by 12. The maximum is 26 weeks. Ontario's example: an employee earning C$1,000 a week with 7 years and 9 months gets C$1,000 × 7.75 = C$7,750.

Is severance pay the same as termination pay in Ontario?

No. Termination pay replaces notice and is owed to almost every employee with 3 months' service, up to 8 weeks. Severance pay is a separate payment for long-service employees at larger employers, up to 26 weeks. An eligible employee gets both — someone with 10 years' service could receive 8 weeks of termination pay plus 10 weeks of severance.

Does the C$2.5 million payroll test only count Ontario wages?

No. Ontario's ESA guide refers to the employer's global payroll, so wages paid to employees outside Ontario — elsewhere in Canada or abroad — count toward the C$2.5 million threshold. A company with a small Ontario office but a large national or international workforce will usually meet the test.

Can severance pay be paid in instalments in Ontario?

Yes, with the employee's written or electronic agreement or the Director of Employment Standards' approval, over no more than 3 years. If an instalment is missed, the whole unpaid balance becomes due immediately. Otherwise severance is due by the later of seven days after the employment ends or the next regular pay day.

Is severance pay taxable in Canada?

Yes. The CRA treats amounts paid in recognition of long service or for loss of employment as a retiring allowance. Income tax is withheld, but CPP contributions and EI premiums are not, and the amount is reported on the T4 with code 66 or 67. Pay in lieu of notice, by contrast, is employment income with CPP and EI deducted.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 12 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Your guide to the Employment Standards Act: Severance pay — Government of Ontario · accessed 12 October 2026
2. 2.Your guide to the Employment Standards Act: Termination of employment — Government of Ontario · accessed 12 October 2026
3. 3.Retiring allowances — Canada Revenue Agency · accessed 12 October 2026
4. 4.Termination of employment (federally regulated employers) — Employment and Social Development Canada · accessed 12 October 2026
5. 5.Dufault v. Corporation of the Township of Ignace — SCC case 41680 — Supreme Court of Canada · accessed 12 October 2026
6. 6.Better late than never: employers in Canada should review their termination provisions — Mintz · accessed 12 October 2026
7. 7.Recent decisions on termination clauses: Dufault v. Ignace — Mann Lawyers LLP · accessed 12 October 2026