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Severance pay is an important part of a tough transition. For team members, it’s a critical safety net that can cover bills and smooth the path toward what’s next. And for employers, it’s often a legal requirement if the company is restructuring, downsizing, or closing its doors.
Severance pay in Canada doesn’t follow a one-size-fits-all model. This guide walks through how it works, when it’s required, and what to consider so everyone can navigate this transition with clarity and confidence.
What is severance pay in Canada?
Severance pay is compensation an employer can provide when a team member is terminated without cause. It’s designed to offer financial breathing room while the departing employee is looking for their next opportunity.
Let’s clear up a common point of confusion: Severance pay isn’t the same as termination pay. Termination pay, also called pay in lieu of notice, applies when someone is let go without the legally required notice period. Severance, on the other hand, is given when someone loses their job due to larger business changes—not performance issues—after a prolonged period of employment.
There’s also something called a working notice, where the employer gives advance notice of the end date and pays regular wages until then instead of paying out all at once. Working notices generally don’t require the employee to keep working, but in some cases, employers may ask team members to continue during the notice period.
So, where does severance fit in? It can be:
- Legally required: The exact number varies depending on the laws in your region, how long someone has been with the company, and the business’s size.
- Negotiated: This is most common when employers want to support team members beyond the minimums or protect against disputes.
- Offered as policy: Some companies have built-in severance practices for certain roles or tenure milestones.
How does severance pay work in Canada?
There’s no standardized process when it comes to severance pay in Canada, and that’s by design. How severance pay works depends on a few key things: where the team member worked, how long they were with the company, and whether they were classified as an employee or an independent contractor.
Employment law in Canada is split between provincial and federal systems, with most workers covered by provincial employment laws. Those team members are entitled to severance, while others may negotiate it as part of their employment contract.
Each province sets its own rules. For example, in British Columbia, eligibility for severance kicks in after three months of service. But in Ontario, team members typically need five years with the same employer.
So, do you get severance pay when laid off in Canada? If a layoff becomes permanent due to role elimination or company restructuring, the law may require the employer to provide severance. But severance doesn’t usually apply for temporary layoffs, unless the employer doesn’t rehire the employee within the timeframe set by provincial or federal guidelines.
If you're navigating role eliminations, layoffs, or just cause dismissals, understanding termination of employment can clarify what’s optional and what’s required in each scenario. And if your company uses an employer of record (EOR) in Canada, the EOR is responsible for managing severance in compliance with local law, reducing the administrative burden on your internal team.
Criteria for severance pay eligibility in Canada
Not every employee qualifies for severance pay in Canada, and their eligibility depends on a few core factors.
Length of employment
In most cases, more time with the company increases the likelihood (and amount) of severance pay. Exact thresholds vary provincially. Alberta, for example, requires 90 days with an employer, while an employee becomes eligible after three months in Quebec. Federally regulated employees also need at least a year of continuous employment.
Reason for dismissal
Severance typically comes into play when a role ends through no fault of the employee, like layoffs or restructuring. This can also include situations involving constructive dismissal, where working conditions are fundamentally changed to the employee's detriment. Dismissals for serious misconduct (known as “just cause”) won’t end in severance pay.
Company size
In some provinces, company size matters. For example, Ontario requires severance only if the employer has a payroll of at least $2.5 million annually, but other provinces don’t include payroll in their severance criteria.
Federal vs. provincial coverage
Most Canadian workers fall under provincial laws, but sectors like banking and air travel are federally regulated. Federal rules require severance after 12 months of service if the employee is terminated due to a layoff or end of function.
How severance pay is calculated in Canada: Key legal factors
There’s no universal formula for calculating severance pay in Canada, but there are legal guardrails. At the statutory level, provincial and federal laws set minimum entitlements. For example, Ontario’s Employment Standards Act outlines when severance applies and how much employers need to give, with formulas based on years of service and employer payroll size.
Federally regulated employees across Canada are typically entitled to two days' pay per completed year of service, or a minimum of five days' wages—whichever is greater. Note these entitlements are legal minimums, not limits. Common law may entitle employees to more, depending on their situation.
Courts often refer to common law when statutory rules don’t reflect a fair outcome, determining what compensation is fairly owed to the employee. In those cases, compensation can go well beyond minimums, up to 24 months of total pay. The amount isn’t just tied to how long someone worked. It considers how disruptive the termination might be to make a more holistic calculation, with factors like:
- Length of service: The longer someone has worked at the company, the more severance they may be entitled to. This variable is usually the baseline for any severance calculation.
- Age of the employee: Older employees often receive higher severance because they’re more likely to face difficulty finding a comparable role quickly.
- Seniority or specialization: If someone held a highly specialized or senior position, they may need more time to secure a similar role, meaning the severance amount may be higher.
Some courts also consider whether the employer recruited the employee from a secure role elsewhere. If so, that move could weigh in favor of a higher payout.
Negotiated severance packages
Not every severance package ends at the legal minimum. Enhanced packages aren’t required by law, but they’re common when the goal is to part ways on good terms. In many cases, especially for senior roles or longer tenures, employers are open to negotiating.
For a typical severance package in Canada, additional benefits might look like:
- More pay than required: Employers might offer extra weeks or months of salary, typically provided as a lump sum payment or in structured installments. Sometimes it matches the employee’s tenure or seniority, and for others it’s just a gesture of goodwill.
- Extended benefits: Health and dental coverage may continue after the last working day, giving the team member breathing room for appointments and prescriptions while figuring out their next move.
- Career support: Some packages include services like resume reviews and job search help to make the next step less overwhelming.
- Legal release: It’s common for the company to ask the employee to sign a release waiving future legal claims in exchange for the enhanced offer.
Steps to take when offered or offering severance
When a severance offer lands on the table, it’s worth it to get everyone feeling as comfortable and confident as possible about the transition. The steps you take next can shape the entire offboarding process.
For employees
Severance is the life raft between you and your next position, so do your research on the steps to come:
- Know your rights: Start by understanding what the law says you’re entitled to. That includes both statutory minimums and common law, which—in some cases—may be much more.
- Get advice: An employment lawyer or financial advisor can help you assess if the offer reflects your situation or if you’re leaving money on the table.
- Negotiate if needed: Most severance offers aren’t set in stone. If something doesn’t seem fair, there’s often room for a conversation.
- Get it in writing: Make sure any revised terms or verbal commitments are confirmed in writing before you sign.
For employers
Not only will you need to be compliant with federal and provincial laws when offering severance, but it’s also in your company’s best interest to keep the process direct and well-documented:
- Be clear and upfront: Outline the offer and terms in a written document that’s easy to follow.
- Give time to review: Short deadlines may create stress and mistrust. A few days to a week to review the offer can go a long way.
- Coordinate with the legal team: Before you present an offer, check in with your Legal or People Ops team to confirm that everything aligns with current laws and internal policies.
- Be ready for questions: Expect team members to come back with clarifying questions and be prepared to walk them through the details.
Ensure compliance across the employee life cycle with Oyster
Severance is just one part of staying compliant when managing a global team, and every step brings its own set of rules. Missing one can mean legal risk or unnecessary costs, so it’s important to understand the requirements and build a process that works across borders.
Oyster supports compliance at every stage of an employee’s journey. Whether you’re hiring and paying employees in Canada, navigating local severance rules, or structuring an offboarding plan, Oyster makes it easier to stay aligned with employment laws and operate with confidence.
Learn more about Oyster’s global compliance support by booking a demo.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
