Selling Your Business? What to Know About Severance and Termination Pay

  • Termination
What to Know About Severance and Termination Pay
Olivia Cicchini

Olivia Cicchini, Employment Law Expert

(Last updated )

According to a recent report by The Canadian Federation of Independent Business (CFIB), 76% of Canadian businesses plan to sell their business over the next decade.

As part of this mass exodus, many small and medium-sized businesses may have to pay severance to their employees. If you are a Canadian employer selling your business, it is important to know what your legal obligations are when it comes to paying severance to your employees.

Employers who fail to provide the required severance pay can face legal action from employees, which can result in costly court fees and damages. In addition, failing to meet legal requirements can damage the reputation of your business and make it difficult to sell in the future.

When selling a business, it is important to consider the impact on employees and to communicate clearly with them about what the sale will mean for their employment. Here’s everything you need to know about selling your business and severance pay in Canada.

What is the difference between severance pay and termination pay?

Firstly, it is important to note that severance is not the same as termination pay. Termination pay is the minimum amount of pay that employers must give to employees who are terminated without cause.

Severance pay, on the other hand, is an additional payment that employers may be required to give to long-term employees who are terminated for reasons such as a sale or closure of a business.

When are employers required to pay severance under Canadian law?

Under Canadian law, there are only two jurisdictions that require an employer to pay severance, federally regulated workers covered under the Canada Labour Code and Ontario employers.

Federally regulated employees who have worked for at least 12 months continuously qualify for severance pay. An employee is entitled to two days’ pay for each full year of service or a minimum of five days, whichever is greater.

In Ontario, an employee who has five or more years of work is entitled to severance pay if the employer has severed 50 or more employees in a six-month period or an employer with a payroll of at least $2.5 million or more.

How much severance pay do I need to pay employees?

The amount of severance pay that must be given is based on a few factors including the length of service of the employee and the employer’s total payroll.

Federally-regulated employees

Federally regulated employees are entitled to severance if they have worked at least 12 consecutive months. Employers are required to two days pay of severance for each year of service or five days, whichever is greater. For example, an employee who has worked for two years is entitled to five consecutive days because five days is greater than the four days calculated for two years of service. On the other hand, an employee who has worked for eight years is entitled to 16 days of severance.

Provincially-regulated employees

In Ontario, an employee is entitled to severance pay if they have worked for five or more consecutive years with the same employer and that same employer has terminated at least 50 employees in the last six months or has a payroll of over $2.5 million.

An employee who meets these requirements is required to receive one week per year of service plus any extra additional months. For example, an employee who has worked for six and a half years is entitled to six and a half weeks of severance pay which is paid at the employee’s regular wage.

Do I have to give notice to my employees if I am selling or closing my business?

When terminating employees, the ESA generally requires employers to provide employees with notice of terminationtermination pay, or a combination of both. In situations where employers want to end employment immediately, they can provide pay in lieu of notice.

By law, employees governed under the Ontario Employment Standards Act (ESA) are entitled to written notice about employment termination. If they have been working for an employer for at least three months, the employer must give them official notice of termination.

Alternatively, employees can be provided with pay in lieu of notice. This means that the employee does not continue to work through a notice period, but instead receives pay as compensation. Employers may prefer this option if they do not want to continue employing a worker up to their termination date.

What other obligations do I have as an employer when it comes to paying severance?

In addition to statutory requirements, employers should also be aware of any contractual obligations they may have to provide severance pay to employees. If severance pay is outlined in an employment contract, the employer must abide by those terms.

Do you need assistance knowing your legal obligations and paying severance to employees?

If you are a Canadian employer selling your business, it is important to be aware of your legal obligations when it comes to paying severance to your employees. This includes understanding the difference between termination pay and severance pay, knowing the specific requirements for your province or territory, and consulting with legal professionals to ensure that you are meeting your obligations. Our team of experts can help you take these steps, ensuring a smooth transition for your employees, and helping you protect your business during the sales process.

To learn more about how our services can benefit your business, call an expert today: 1 (833) 247-3652

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