Severance pay (statutory)

Statutory severance pay can add a cost on a sale where long-serving staff are let go. A buyer can meet it when staff are let go after closing, and a seller when disclosing liabilities.

How it works

Ontario’s Employment Standards Act, section 64, requires an employer who severs an employment relationship to pay severance pay if the employee was employed for five years or more and one of two further conditions is met: the severance results from a permanent discontinuance of all or part of the business at an establishment affecting a set number of employees in a six-month period, or the employer’s payroll meets the Act’s threshold. Prescribed employees are not entitled to it (s. 64(3)). Severance pay is in addition to other amounts owed under the Act or the contract, subject to the set-offs and deductions listed in section 65(8). Ontario’s guide says the termination rules are entirely separate from severance entitlements. The Canada Labour Code requires it for employees with twelve consecutive months of continuous employment, except on dismissal for just cause (s. 235(1)). Other provinces differ.

What to check or ask

• Each employee’s start date and years of service
• Which statute applies, provincial or federal
• Whether an exemption applies, such as dismissal for wilful misconduct

The allocation question is covered in who pays severance when a business is sold. Related: termination pay.