Do you get severance pay when laid off in Canada?

Whether it’s you, your spouse, uncle, or friend — layoffs could affect any Canadian. Just this year, Google laid off 2,000 Canadian employees, while Cineplex laid off 5,000. Then there are entire industry-wide layoffs amid economic crises like COVID-19. Forbes shares that, for many, losing work is akin to losing identity, bringing tons of mental health struggles as lingering effects. But one thing certainly helps lighten the blow of a disappeared pay cheque: a bulk pay cheque, aka severance. Fortunately, severance pay can help, but not everyone knows the answer to the question, do you get severance pay when laid off in Canada.

This is an area where Canadian labour laws are much more representative for the employee than in the USA, where companies can terminate for pretty much no reason and legally enforce no-termination pay clauses. 

So, do you get severance when laid off in Canada? Yes and no — it depends on your place of work, time spent working there, position, reason for job loss, and much more. We’ll cover the basics below to help you prepare for the worst.

What is severance pay?

Severance is money that an employer is legally obligated to pay an employee if they lose their job. However, severance is only applicable if an employee loses their job by “no fault of their own.” In other words, if you quit, severance pay does not apply.

You can receive severance in three ways, either decided by your employer or negotiated:

• Lump-sum payment
• Salary continuance for a limited time
• Deferred payments over the course of several years

Still, you’ll usually have to work for at least 12 months before being eligible for severance. That means if you only work for two months before a company goes under or decides to cut your department, the employer isn’t legally obligated to pay out severance. Why? Because you’re still on probation in most cases. 

Of course, different employer and employee contracts could have sections about severance circumstances that could take effect even before 12 months (after probation). Although a 12-month working requirement is more common. In addition, this is in alignment with most provincial and territorial employment standards.

Keep in mind there is the law and there’s ethics. Some employers are more rigid and only pay severance according to what the law says. Other employers who are value driven may payout more severance or offer other termination benefits that goes beyond the law. It ultimately depends on the individual employer.

How much severance pay can you get when laid off?

The exact amount you get from a severance package varies depending on a few factors: 

• Contract: Does your employment agreement have a termination clause? Review it carefully before signing, as it could impact your severance amount. 

• Seniority: Employees who have worked longer for a company might be entitled to more severance than newer ones. Normally, severance payouts are based on the number of years with a company. The higher the number, the larger the payout.

• Position: Severance is aligned with your position’s salary, so an executive would naturally receive more severance than an entry-level worker. 

Each provinces has formulas to calculate minimum severance pay. For example, the Ontario government calculates severance like so: 

Employer’s regular one week’s wage x (Years of employment completed + (months of employment completed/12)) = Minimum severance pay

Now, what does this look like in practice? Say an employee worked five years and six months for a company and makes an average of $1,000 per week. Here’s the calculation:

• One week’s wage: $1,000
• Years of employment completed: 5
• Months of employment completed divided by 12: 6/12= 0.5

Let’s put it all together: $1,000 x (5 + 0.5) = $5,500

The above calculation encompasses the amount required by law. As mentioned, some employers may payout more than required by law, particularly those driven by values and ethics. Paying greater severance benefits a company’s reputation and helps them remain competitive in their industry. However, it’s important to understand the minimum amounts at the very least to ensure you’re getting what you’re entitled to by law.

Situations where severance pay is mandatory

You might wonder: what does “no fault of your own” entail? For starters, you can’t get severance if you’re fired for poor performance or “with cause”. But if an employer fires you under false pretenses of poor performance, you could argue a claim for severance. In addition, if your employer violated the law at any point of your employment or termination, you can build a case against them and seek a payout in court. Finally, severance isn’t payable to those who quit their jobs.

Layoffs resulting in termination are the most common form of job loss eligible for severance. The company makes a decision to downsize, and the choice isn’t based on an employee’s individual performance. While different provinces have specific regulations, here are some common reasons for severance according to Ontario’s laws: 

• Company bankruptcy or insolvency
• Layoff for at least 35 of a 52-week period (less than 25% of regular wages)
• Business closes permanently

What is the difference between termination pay and severance pay?

Companies pay severance upon termination — so you can see how termination pay and severance pay might get a little tricky. The gist is that termination pay can include severance, but severance doesn’t encompass all types of termination pay. 

Legal professionals at Sultan Lawyers describe termination pay as “much broader” than severance and informed by common law principles, not just a province’s employment standards.

Upon termination, your employer often owes other pay aside from severance. This can include:

• Final pay for days worked
• Vacation pay
• Unpaid employee expenses for reimbursement
• Additional lump sums outside of severance pay

Who is entitled to severance pay in Canada?

The federal government is a little vague in their definition of eligibility. All they say is anyone who “loses their job by no fault of their own” is entitled to severance pay in Canada. Most provinces have varying minimum working timelines for when employees can be eligible for severance, ranging anywhere from three months to one year. 

Here are some common situations where employees are eligible or not eligible for severance:

Eligible for Severance	Not Eligible for Severance
Laid off (including reduced hours) to the point where you’re making 25% of your original wages or less	Quit for any reason (to pursue a new job, go to school, etc.)
Wrongful dismissal; occurs when an employer fires you without cause and is usually based on unfair practices, like discrimination	Terminated with cause for poor job performance (usually you’re placed on a performance improvement plan before this happens)
Company declares bankruptcy, is restructuring, or cutting costs	Misconduct; another form of being terminated with cause, but relates to qualitative aspects of the job, such as tardiness, professionalism, bad language, etc.

Still, you might be able to negotiate your severance amount and eligibility before you sign your employment agreement. When offered a position, always check the agreement’s termination clause. Don’t be afraid to dive into it in more detail with your prospective employer. This is especially true if the job in question has a history of short term employment. You might add a clause to promise you severance in the event of a position’s responsibilities evolving, for example, and being terminated as a result. 

Is severance pay mandatory in Canada?

In most situations where employees lose their jobs without fault of their own — yes. But you should always examine your employment agreement carefully, even with a lawyer, to know for sure. The agreement could have a termination clause that could shield the company from having to give out termination pay that you’d otherwise be eligible for. Still, those clauses aren’t always legally enforceable. The answer is usually yes, and if it’s no, talk to a lawyer to make sure.

Do you get severance pay when laid off in Canada?

Generally speaking, yes, you usually get severance pay when laid off in Canada. Although, you won’t be eligible in every situation. Every person’s circumstance is different so it depends on a lot of factors.

To make things easier, we put together a little bulleted list of example situations where you could get severance and when you can’t. Remember, these are also subject to specific termination clauses within your employment agreement and subsequent legal consultation — every situation is unique.

You can get severance if you’ve been working for a company at least 3 months and: 

• You’re laid off or receive hour assignments that are reduced to 25% of your normal hours or pay.
• Your employer is cutting costs, downsizing, or reducing redundant departments. 
• Your employer is going bankrupt.
• Your employer fires you for poor performance but you can prove that it was wrongful dismissal or discrimination. 

You can’t get severance if you’re terminated and:

• You haven’t yet completed three months of employment (passed the probation period).  
• You’re fired for poor performance and your employer gave you the opportunity to improve your performance based on feedback. 
• You’re fired for committing a crime at work or other misconduct. 
• You’re fired for breaching your employment contract, whether it’s a confidentiality issue or political activity. 
• You’re terminated as a contractor or freelancer and your contract does not specify termination pay.

What to do when you get laid off in Canada

Bottom line: do you get severance pay when laid off in Canada? In most cases yes, but there are circumstances when severance pay doesn’t apply.

Not sure if you’re eligible? If you’ve been laid off, either permanently or temporarily, it’s worth it to consult a labour lawyer. Tons of employees don’t realize what they’re entitled to until they do so. In addition, lawyers can help you with the negotiation process to get more than the initial offer from your employer. We get it — it’s scary to confront your employer and ask for what you want. Get help when you need it!

Still, layoffs and job loss can hurt your personal finances even with severance pay. This is especially true if you can’t find another job quickly and easily. It’s difficult to plan for the future after losing this sense of stability, even with a temporary promise of payments in the interim. That’s why it’s so important to consult a financial advisor as well. Advisorsavvy connects certified financial advisors with thousands of Canadians like you who want to learn more about investing, budgeting, and planning for their future. Connect with a financial advisor today!

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