Severance Pay in Canada 2025: What You're Owed

Updated March 2025 • 11 min read

When you are let go from a job, you may be entitled to more money than your employer initially offers. Severance pay in Canada is governed by both provincial employment standards legislation (which sets minimums) and common law (which often provides significantly more). Here is what you need to know.

Two Types of Severance Rights

1. Statutory Minimums (Employment Standards)

Every province has an Employment Standards Act (ESA) or equivalent that sets minimum termination notice or pay in lieu of notice. These are the legal floor — employers cannot pay less. Common minimums:

• Ontario ESA: 1 week notice per year of service, up to 8 weeks; plus severance pay (separate from termination pay) of 1 week per year for employees with 5+ years at a large employer (payroll over $2.5M)
• BC ESA: 1 week after 3 months, escalating to 8 weeks after 8+ years
• Alberta ESA: 1 week after 90 days, up to 8 weeks after 10+ years
• Federal employees (federally regulated industries): Canada Labour Code applies — typically 2 days per year of service, minimum 5 days

These minimums are just that — minimums. Most departing employees are entitled to significantly more.

2. Common Law Reasonable Notice

Unless you have a valid written employment contract limiting you to statutory minimums, you are likely entitled to "reasonable notice" under common law. This is far more generous than statutory minimums.

Courts consider: length of service, age, position (senior employees get more), availability of comparable employment, and inducement (if you were specifically recruited). A general rule of thumb is 1 month per year of service for mid-level employees, though court awards vary significantly. Executives and senior employees often receive more.

Severance Pay vs. Pay in Lieu of Notice

Employers can either provide working notice (you continue to be paid and work through the notice period) or pay in lieu of notice (a lump sum). Most severance packages are pay in lieu of notice. Some packages combine both — a period of working notice plus additional pay.

Is Your Employment Contract Limiting Your Rights?

Many employment contracts include termination clauses that attempt to limit your notice to statutory minimums. However, these clauses are frequently found to be unenforceable by Canadian courts if they:

• Were not brought to your attention or signed at the time of hire (after the fact additions may not be binding)
• Provide less than statutory minimums (even a partial violation can void the clause entirely)
• Are ambiguous in their drafting

Before signing a severance offer, consult an employment lawyer. Many offer free initial consultations and will often review a severance offer for a flat fee.

What Is Typically in a Severance Package?

• Pay in lieu of notice (the main severance payment)
• Continuation of benefits (extended coverage period)
• Continuation of bonus or commission pro-rated to termination date
• Outplacement services (job search coaching, resume help)
• Retirement of stock options or equity (if applicable)

Severance and EI

Receiving a severance payment affects when your EI benefits begin. Service Canada allocates severance as "earnings" over a period before EI benefits start. The longer the severance period (in weeks), the longer the delay before EI kicks in.

However, the delay is not forever — once the severance period is "used up," your EI waiting period starts and benefits begin. This is usually not a reason to refuse a larger severance, but it is something to account for in your cash flow planning.

Tax on Severance Pay

Severance pay is taxable income. In many cases, employers withhold tax at a flat rate that may not reflect your actual marginal rate — you may owe more at tax time or receive a refund depending on your situation.

Retiring allowance RRSP contribution: For service prior to 1996, there is a special provision allowing a portion of severance (called a "retiring allowance") to be contributed directly to an RRSP without affecting normal contribution room. This benefit is rarely applicable today but worth checking with a tax advisor if you have pre-1996 service.

Should You Sign the Severance Offer?

Never sign immediately. Most employers give you time to consider — and in some provinces you have a statutory cooling-off period. Steps to take:

1. Read the entire package carefully, including any release you're being asked to sign
2. Consult an employment lawyer — most will review a severance offer for $500–$1,500
3. Understand your statutory minimums before evaluating the offer
4. Consider whether the offer is close to reasonable notice given your circumstances
5. Negotiate if the offer is below what you should receive — it is completely normal to counter

Signing a release waives your right to sue for wrongful dismissal. Once signed, you typically cannot reopen the negotiation. The cost of a lawyer to review the offer is almost always worth it.