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Severance Pay in Canada: Statutory vs Common-Law Entitlements

When an employee in Ontario is terminated without cause, two separate entitlements may apply. Termination pay (notice) under the Employment Standards Act (ESA) provides 1 week of pay per year of service, up to 8 weeks maximum, for employees with 3 or more months of service. Statutory severance pay is an additional entitlement for employees with 5 or more years of service at employers with a payroll of $2.5 million or more (or who are laying off 50+ employees). Severance pay equals 1 week per year of service, up to 26 weeks. These are minimum floors — employers can and often do owe more.

Under the common law, courts typically award “reasonable notice” of termination that exceeds the ESA minimums significantly. The Bardal factors — established in the 1960 decision Bardal v. Globe & Mail — guide the determination: the employee’s age, length of service, character of employment (seniority level), and the availability of similar work. As a rough benchmark, courts award approximately 1 month per year of service, with older employees (50+) and senior positions often receiving 1.5 months or more per year. The practical upper limit is 24 months, though courts have occasionally exceeded it.

Ontario ESA Minimums (2026)

Severance pay is fully taxable as employment income. However, if you transfer it to an RRSP (where eligible), you can defer the tax. The “eligible retiring allowance” lets you contribute $2,000 per year of service before 1996 directly to your RRSP without affecting your contribution room. For service after 1995, any lump-sum severance deposited to an RRSP uses your regular contribution room. Always consult an employment lawyer before signing a severance offer, as initial offers are frequently below what the common law entitles you to.