Severance vs. Termination Pay: They Are Not the Same Thing

The Confusion That Costs Employees Thousands

Every week in Ontario, employees are terminated and told they are receiving "severance." They sign a release. They move on. And many of them leave money on the table because the word "severance" was doing double duty — covering up the fact that they were owed two separate payments, not one.

Under Ontario's Employment Standards Act, 2000 (ESA), S.O. 2000, c. 41, termination pay and severance pay are distinct statutory entitlements with different eligibility requirements, different calculation methods, and different purposes. They are not interchangeable terms. They are not the same thing. And employers who present them as a single "severance package" are either confused or strategic — and neither is good for you.

Termination Pay: The Notice Entitlement

Termination pay under the ESA is pay in lieu of notice. It exists because the law requires employers to provide advance written notice of termination. If the employer does not provide working notice (or provides inadequate notice), they must pay termination pay instead.

Eligibility

Every employee with three or more months of continuous service is entitled to termination pay upon a without-cause dismissal. There are limited exceptions — employees guilty of wilful misconduct, employees on temporary layoff in compliance with ESA rules, and employees whose fixed-term contract has expired.

Calculation

Termination pay is calculated based on length of service:

Length of Service	Notice / Termination Pay
3 months to less than 1 year	1 week
1 year to less than 3 years	2 weeks
3 years to less than 4 years	3 weeks
4 years to less than 5 years	4 weeks
5 years to less than 6 years	5 weeks
6 years to less than 7 years	6 weeks
7 years to less than 8 years	7 weeks
8 years or more	8 weeks

The maximum under the ESA is eight weeks. This is the ceiling for statutory termination pay, regardless of how long the employee has worked.

What Counts as a "Week" of Pay

A week of termination pay is calculated based on the employee's regular wages for a regular work week. For employees with variable hours, it is an average over the most recent period of normal work. Overtime, bonuses, and commissions may or may not be included depending on whether they constitute "regular wages" — a question that has generated significant case law.

Severance Pay: The Separate Entitlement Most People Miss

Severance pay is a separate entitlement under Part XV.1 of the ESA. It is compensation for the loss of long-term employment — recognition that an employee who has invested significant time in one employer has built up a kind of equity in the relationship that is lost upon termination.

Eligibility

Severance pay has more restrictive eligibility requirements than termination pay. The employee must have:

1. Five or more years of service with the employer, AND
2. The employer must have a payroll of $2.5 million or more in Ontario, OR the severance is part of a mass termination of 50 or more employees within a six-month period.

The payroll threshold is significant. Small businesses — even those with long-tenured employees — may not owe severance pay under the ESA if their Ontario payroll is below $2.5 million. But large employers with significant payrolls owe severance in addition to termination pay.

Calculation

Severance pay is calculated at one week of regular wages per year of service, prorated for partial years, up to a maximum of 26 weeks.

For example, an employee with 12 years and 6 months of service would receive 12.5 weeks of severance pay. An employee with 30 years of service would receive the maximum of 26 weeks.

The Combined Entitlement

An employee who qualifies for both termination pay and severance pay receives both. They stack. An employee with 10 years of service at a large employer would receive:

• 8 weeks of termination pay (the maximum under the ESA)
• 10 weeks of severance pay (1 week per year of service)
• Total: 18 weeks of ESA entitlements

Compare this to the common assumption that "severance" is just eight weeks. The employee in this example is owed more than double what many people think the ESA provides.

Why the Confusion Persists

The terminology problem is pervasive. In casual conversation, lawyers and non-lawyers alike use "severance" to mean the total package an employee receives upon termination. This conflation is harmless in informal discussion but dangerous in legal analysis.

The confusion is compounded by the fact that many employers present a single "severance package" that bundles termination pay, severance pay, and any additional contractual or goodwill payments into one number. The employee sees a lump sum and has no way of knowing whether it includes both statutory entitlements.

This matters for several reasons:

1. Adequacy assessment. If an employee doesn't know that termination pay and severance pay are separate entitlements, they cannot assess whether the offer is adequate. An offer of 10 weeks to an employee entitled to 18 weeks of combined ESA payments is inadequate — but the employee might accept it, thinking 10 weeks is generous.

2. Common law entitlements. Both termination pay and severance pay are ESA minimums. Common law reasonable notice entitlements — which can extend to 24 months or more — are separate and additional. An employee who understands the ESA baseline is better positioned to evaluate whether a common law claim is worth pursuing.

3. Release negotiations. When signing a release, the employee should verify that the package explicitly accounts for both termination pay and severance pay (if applicable) as distinct line items. A release that acknowledges receipt of "termination pay in accordance with the ESA" but says nothing about severance pay may leave the severance entitlement unaddressed.

The Common Law Layer: Where the Real Money Is

The ESA entitlements — even combined — are a floor, not a ceiling. The common law provides for reasonable notice that can dwarf the statutory minimums.

Consider the math for a 55-year-old senior manager with 15 years of service at a large employer:

• ESA termination pay: 8 weeks
• ESA severance pay: 15 weeks
• ESA total: 23 weeks
• Common law reasonable notice: Likely 18-24 months (78-104 weeks)

The gap between 23 weeks and 78 weeks is more than a year's salary. This is the gap that termination clauses are designed to close — and the gap that defective termination clauses fail to close.

Under Machtinger v. HOJ Industries Ltd., [1992] 1 SCR 986, the Supreme Court held that any termination provision that falls below the ESA floor is void, and the employee's entitlement reverts to the common law. This means that an employer who offers only the ESA minimums without an enforceable termination clause limiting the employee's entitlement may owe far more.

Benefits Continuation During the Notice Period

A frequently overlooked ESA requirement is benefit continuation. During the statutory notice period (whether the employee is working notice or receiving termination pay), the employer must continue making contributions to benefit plans — including health insurance, dental coverage, life insurance, and pension plans.

This obligation is separate from the termination pay and severance pay calculations. An employer who pays termination pay but cancels the employee's benefits on the last day of work has violated the ESA. The failure to continue benefits during the notice period has been cited by courts as a defect that renders termination clauses unenforceable — a point reinforced in Dufault v. The Corporation of the Township of Ignace, 2024 ONSC 1029.

Vacation Pay Upon Termination

In addition to termination pay and severance pay, terminated employees are entitled to their accrued vacation pay. This includes vacation pay that has accrued but not yet been paid, as well as a proportional vacation pay accrual for the period since the employee's last vacation pay entitlement date.

Vacation pay is calculated at a minimum of 4% of gross wages (or 6% for employees with five or more years of service, as amended by the Working for Workers Act, 2023). This is not part of termination pay or severance pay — it is a separate entitlement that must be paid upon termination regardless of the circumstances.

Mass Termination Rules

When an employer terminates 50 or more employees within a four-week period at one establishment, the mass termination provisions of the ESA apply. These provisions require:

• Longer notice periods: 8 weeks for 50-199 terminations, 12 weeks for 200-499, and 16 weeks for 500 or more.
• Notification to the Director of Employment Standards before the terminations take effect.
• Separate calculation: Mass termination notice is separate from individual termination notice. The employee receives whichever is greater.

Mass terminations also trigger the severance pay entitlement regardless of the employer's payroll — the $2.5 million threshold does not apply when 50 or more employees are terminated.

Practical Steps When You Are Terminated

1. Identify your ESA entitlements separately. Calculate your termination pay and your severance pay as distinct amounts. Don't accept a combined number without understanding both components.

2. Check the employer's payroll. If you have five or more years of service, you may be entitled to severance pay — but only if the employer's Ontario payroll exceeds $2.5 million. Public information, industry norms, and the employer's size can help you estimate this.

3. Compare to common law. The ESA entitlements are the floor. If your employment contract does not contain an enforceable termination clause, you may be entitled to common law reasonable notice — which is almost always higher.

4. Verify benefits continuation. Your employer must continue benefit plan contributions during the statutory notice period. If they terminate your benefits immediately, they may have violated the ESA.

5. Get the breakdown in writing. Ask your employer to provide a detailed breakdown showing how the severance package was calculated, including separate figures for termination pay, severance pay, vacation pay, and any additional amounts.

6. Seek legal advice before signing a release. The release is your employer's document, not yours. Understand what you're giving up before you sign.

The Bottom Line

Termination pay and severance pay are two different things. They have different eligibility requirements, different calculation methods, and different purposes. Treating them as interchangeable costs employees money — sometimes a lot of money.

The ESA framework is not complicated once you understand the structure. Termination pay is pay in lieu of notice. Severance pay is compensation for the loss of long-service employment. Both are statutory minimums. Both can be exceeded by common law entitlements. And both must be accounted for separately when evaluating any termination package.

If your employer hands you a number and calls it "severance," ask the question: does that include both?