Termination pay in Ontario: What employers must pay

Published Thursday 23 July 2026

Table of contents

• What is termination pay in Ontario?
• Who qualifies for termination pay?
• How to calculate termination pay
• When to pay and what to do during notice
• How termination pay differs from severance pay
• Reasonable notice at common law
• Simplify termination pay and payroll with Xero
• FAQs on termination pay in Ontario

Key takeaways

• To meet your obligations, you’ll need to provide written notice, or pay in lieu that meets ESA minimums based on the notice period in Ontario.
• To get the amount right, you’ll need to calculate termination pay correctly, using regular weekly wages or a 12-week average if pay varies.
• Always pay termination pay on time - within 7 days or the next regular payday (whichever is later), and continue benefits during any working notice period.
• Separate termination pay from ESA severance and assess any common law exposure.

What is termination pay in Ontario?

Termination pay in Ontario is the compensation you must provide when you end employment without adequate notice under the Employment Standards Act (ESA). It's pay in lieu of notice – money that replaces the working notice period an employee would otherwise receive.

When you terminate an employee who has been with you for a while, you generally can't just let them go on the spot. For any employee who has been continuously employed for three months, you must provide either written notice of termination, termination pay, or a combination of both.

For long-term employees, the required notice can be up to 8 weeks, with the ESA specifying a notice period of eight years or more equalling 8 weeks.

Termination pay covers the wages and benefits the employee would have earned during that notice period. It's separate from severance pay, which has different eligibility rules and serves a different purpose.

The ESA requires you to provide either working notice, where the employee continues working during the notice period, or termination pay as a lump sum. You can also combine both – for example, two weeks' working notice plus six weeks' pay in lieu.

For detailed ESA guidance, see the Employment Standards Act termination and severance manual from the Ontario Ministry of Labour.

Understanding these requirements protects your business from complaints, penalties, and wrongful dismissal claims, so it’s worth getting the calculation and timings right from the start.

Who qualifies for termination pay?

Most employees in Ontario qualify for termination pay after 3 months of continuous service. The ESA applies broadly across industries and company sizes, covering full-time, part-time, and casual workers alike.

Termination without cause in Ontario triggers the notice or pay requirement. Without cause means you're ending employment for business reasons, such as restructuring, downsizing, or position elimination, rather than for employee misconduct.

If you terminate for just cause under the ESA, you don't owe notice or termination pay. To prove just cause, there must have been wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer. This is narrower than common law just cause, which considers a broader range of conduct and whether the employment relationship is beyond repair.

Take care when asserting just cause. If you can't prove it, you'll likely need to provide full termination pay and may also face additional damages for wrongful dismissal. Some employers may choose to provide notice or pay even when cause might exist, to reduce legal risk.

Common exemptions at a glance

Not every employment relationship triggers ESA termination pay obligations. Key exemptions include:

• employment under 3 months of service
• termination for wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and hasn't been condoned
• end of a fixed-term contract on its stated end date with no early termination
• construction employees as defined by the ESA
• employees who refuse reasonable alternative employment offered by the employer
• frustration of contract, such as when an employee becomes permanently unable to work
• retirement at or after age 65 under a workplace pension or retirement plan
• job abandonment in Ontario, where the employee leaves without notice and doesn't return

Seasonal employees and temporary layoffs have special rules. A layoff is generally considered temporary if it lasts for not more than 13 weeks within a 20-consecutive-week period. The ESA also allows some layoffs to last longer, up to 35 weeks in a 52-week period, if certain conditions are met.

Always verify exemptions carefully – and if you’re unsure, review Xero’s guide to small business payroll in Canada or seek legal or HR advice before withholding termination pay.

When does a temporary layoff become a termination?

A temporary layoff becomes a termination under the Employment Standards Act once it exceeds the permitted timeframe. At that point, you owe the employee termination pay and severance pay, if applicable, calculated from the date the layoff began.

The ESA thresholds are:

• a layoff of more than 13 weeks in any 20-week period
• a layoff of more than 35 weeks in any 52-week period, where you continue to pay benefits or make certain other payments during the layoff

Make sure to track layoff start dates carefully. If a layoff crosses either threshold, it's deemed a termination, and your payment obligations apply retroactively.

How to calculate termination pay

Termination pay equals the wages the employee would have earned during the ESA notice period. You calculate it by multiplying the employee's regular weekly wages by the number of weeks of notice they're entitled to under the ESA.

The ESA notice period depends on length of service:

• 3 months to 1 year: 1 week
• 1 year but less than 3 years: 2 weeks
• 3 years but less than 4 years: 3 weeks
• 4 years but less than 5 years: 4 weeks
• 5 years but less than 6 years: 5 weeks
• 6 years but less than 7 years: 6 weeks
• 7 years but less than 8 years: 7 weeks
• 8 years or more: 8 weeks

Note that common law notice in wrongful dismissal in Ontario cases can be significantly higher – often one month per year of service or more, depending on factors like age, position, and ability to find comparable work. ESA entitlements are minimums; employees may have greater rights at common law.

For variable hours or pay

If the employee's hours or pay vary week to week, calculate their average weekly wages over the 12 weeks they actually worked before termination. Include all regular wages, commissions, and piece-rate earnings paid during that period.

Exclude weeks where the employee didn't work at all, such as unpaid leave. Sum the total wages earned in the 12 worked weeks, then divide by 12 to get the average weekly wage.

What to include in wages

For ESA termination pay purposes, wages include:

• regular hourly or salary pay
• commissions earned and payable
• piece-rate or performance pay
• public holiday pay that would have fallen during the notice period
• vacation pay that would have accrued during the notice period
• any other amounts that would have been earned during working notice

Don’t include discretionary bonuses such as holiday bonuses or employee-of-the-month awards. Non-discretionary bonuses tied to performance targets or formulas should be included if they would have been earned during the notice period.

4 steps to calculate termination pay

Use these steps to keep the calculation consistent with ESA rules:

1. Identify the ESA notice period based on length of service and whether mass termination rules apply. Start by determining how long the employee has worked for you continuously. This includes any probationary period and counts from their first day of employment. Check the ESA notice schedule above to find the minimum weeks owed. If you're terminating 50 or more employees at one location within four weeks, mass termination rules may apply instead, which provide longer notice periods.
2. Determine the regular weekly wage or the 12-week average for variable pay. For employees with consistent weekly pay, use their regular weekly wage amount. For those with variable hours or commission-based pay, calculate the average weekly earnings over the 12 weeks they actually worked before termination. Include all regular compensation but exclude discretionary bonuses.
3. Multiply the weekly amount by the ESA notice weeks to get termination pay in lieu. Take the weekly wage figure from step two and multiply it by the number of notice weeks from step one. This gives you the base termination pay amount. This calculation represents what the employee would have earned in regular wages during the notice period.
4. Add vacation pay accrued to the date of termination and any amounts that would have accrued during the notice period. Include any vacation pay the employee has earned but not yet taken, plus vacation pay that would have accrued during the notice period. Also add any public holiday pay that would have fallen during the notice period if the employee had continued working.

Take these two example scenarios to see how this could work in practice:

1. An employee with 6 years of service earns $1,000 per week. ESA notice is 6 weeks. Termination pay = $1,000 × 6 = $6,000, plus accrued vacation pay.
2. An employee with variable pay over 4 years of service earned $12,000 over 12 weeks worked. Average weekly wage = $12,000 ÷ 12 = $1,000. ESA notice is 4 weeks. Termination pay = $1,000 × 4 = $4,000, plus accrued vacation pay.

Accurate calculation protects you from Ministry of Labour complaints and keeps things fair.

When to pay and what to do during notice

Timing matters. The ESA requires you to pay termination pay within 7 days after the employment ends, or on what would have been the employee's next regular payday, whichever is later.

If you provide working notice instead of pay in lieu, the employee continues working and receiving regular wages and benefits until the notice period expires. During working notice, maintain all terms and conditions of employment – wages, benefits, vacation accrual, and entitlements – exactly as if termination weren't happening.

You can combine working notice and pay in lieu. For example, give two weeks' working notice and pay four weeks in lieu for a total of six weeks' notice. The same payment deadline applies to the lump-sum portion.

Working notice vs pay in lieu

Working notice means the employee remains on the job, performing their duties and earning regular pay and benefits throughout the notice period. This option works well when you need knowledge transfer, project completion, or a smooth transition.

Pay in lieu means you pay the employee a lump sum immediately and end employment right away. The employee stops working and loses access to systems and premises. This is common when the employee's role is redundant, when you're concerned about morale or confidentiality, or when the employee requests it.

During working notice, the employee can resign and leave early. If they do, you must still pay wages earned up to the resignation date, but you don't owe the remaining notice period.

Mass termination rules at a glance

A mass termination occurs when you terminate 50 or more employees at one location within a 4‑week period. In this case, notice periods increase significantly:

• 50 to 199 employees: 8 weeks' notice
• 200 to 499 employees: 12 weeks' notice
• 500 or more employees: 16 weeks' notice

You must also file Form 1 (Notice of Termination) with the Ministry of Labour, and provide written notice to the union, if any, and to the Ministry. Failing to meet mass termination requirements can result in penalties and extended notice obligations.

See the ESA manual section on mass termination for full details.

What to do when ending an employment relationship

When you're ready to let someone go, follow these steps to stay compliant and organized:

1. Prepare a written notice of termination with the end date, a reason if providing one, and notice or pay details.
2. Calculate final pay: termination pay, accrued vacation pay, outstanding wages, and any other entitlements.
3. Deduct required amounts: income tax, CPP, EI, and any other statutory or agreed deductions.
4. Continue benefit coverage during any working notice period; confirm when coverage ends if paying in lieu.
5. Issue the final pay stub and Record of Employment. You have a short window to issue the ROE electronically; generally, you have five calendar days after the end of the pay period in which an employee's interruption of earnings occurs to issue it.
6. Provide a letter confirming the termination, final pay breakdown, and benefit end dates.
7. Return any personal property and retrieve company property.

Clear documentation and timely payment reduce disputes and help you maintain a professional, compliant process when you end an employment relationship.

How termination pay differs from severance pay

Termination pay and severance pay in Ontario are distinct entitlements with different purposes, eligibility rules, and calculations. Many employers confuse them, but understanding the difference is important for compliance.

Termination pay compensates for lack of notice. It's owed to most employees with 3+ months of service when you terminate without cause and without providing adequate working notice. The amount is based on the ESA notice period of 1 to 8 weeks depending on service.

Severance pay compensates for loss of seniority and job security after long service or during mass layoffs. It's a separate, additional payment owed only to employees who meet specific eligibility criteria.

Severance eligibility and calculation basics

Severance pay in Ontario is owed when:

• The employee has five or more years of service, and
• The employer has a global payroll of at least $2.5 million, or
• The employer has terminated 50 or more employees in a 6-month period due to permanent discontinuance of all or part of the business

Severance is calculated as one week of regular wages per year of service, up to a maximum of 26 weeks. Partial years are pro-rated, so 7.5 years of service equals 7.5 weeks of severance pay.

Regular wages for severance means the employee's normal weekly earnings, excluding overtime but including regular salary, commissions, and other recurring compensation.

Payment options: You can pay severance as a lump sum or, with the employee's written agreement, in installments over a period of up to 3 years. Termination pay must be paid as a lump sum by the ESA deadline of 7 days or next payday.

Packages: Many employers offer a severance package in Ontario that combines ESA termination pay, ESA severance pay (if applicable), and additional amounts to reflect common law notice. These packages often go above ESA minimums to reduce the risk of wrongful dismissal claims and, in return, the employee usually agrees in writing not to pursue further legal action.

Reasonable notice at common law

Common law reasonable notice is the notice period a court would award in a wrongful dismissal claim. It sits above ESA minimums and is often significantly longer. Meeting your ESA obligations doesn't automatically protect you from a wrongful dismissal claim.

Courts determine reasonable notice based on several factors:

• length of service, as longer tenure generally means longer notice
• age, as older employees typically receive longer notice periods
• position and seniority, due to the fact that senior or specialized roles require longer notice
• availability of comparable work, as limited job market options increase the award

As a general rule of thumb, courts often award roughly 1 month of notice per year of service, though this varies widely. A 10-year employee in a senior role could receive 18 to 24 months' notice, far beyond the ESA's 8-week maximum.

To manage your common law exposure, consider these 3 approaches:

1. Offer a settlement package that exceeds ESA minimums in exchange for a signed release, reducing your legal risk.
2. Include an enforceable termination clause in employment contracts that limits notice to ESA minimums. Get legal advice to ensure the clause is drafted correctly, as courts will void clauses that fail to meet ESA requirements.
3. Seek legal advice before terminating long-service, senior, or older employees, where common law exposure is highest.

Simplify termination pay and payroll with Xero

Managing termination pay, severance, and final payroll can be complex and time‑consuming. Xero helps you keep payroll records accurate, automate calculations, and stay organized so you can focus on running your business. Get one month free to see how Xero can support your payroll and reporting.

FAQs on termination pay in Ontario

This section answers common questions about termination pay in Ontario. It covers tax treatment, calculation details, payment timing, and special scenarios that often arise when you end employment.

Is termination pay taxable and what deductions apply?

Yes, termination pay is fully taxable as employment income. You must deduct income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from termination pay just as you would from regular wages.

Termination pay is classified as employment income for tax purposes. Use the Canada Revenue Agency (CRA) Payroll Deductions Online Calculator to determine the correct withholding amounts, and report the payment in Box 14 of the T4 slip.

For detailed guidance, see the CRA's Employers' Guide – Payroll Deductions and Remittances.

Do commissions or bonuses count in the calculation?

Yes, include non-discretionary commissions and bonuses when calculating termination pay. If the employee earns commissions or performance-based pay as part of their regular compensation, include those amounts in the weekly wage calculation.

Use the 12-week average method: total all wages, commissions, and non-discretionary bonuses earned in the 12 weeks the employee actually worked before termination, then divide by 12.

Exclude discretionary bonuses such as holiday gifts, spot awards, and employee-of-the-month prizes because they aren't guaranteed or tied to a formula. For more on handling variable pay, see the CRA's.

Can I pay termination pay in installments?

No. The ESA requires you to pay termination pay, or pay in lieu of notice, as a lump sum within 7 days of termination or on the next regular payday, whichever is later.

Severance pay, however, can be paid in installments over up to 3 years if the employee agrees in writing. Make sure any installment agreement is documented and signed before you begin payments.

What happens if an employee resigns during the notice period?

If you provide working notice and the employee resigns before the notice period ends, you must pay wages earned up to the resignation date. You do not owe pay for the remainder of the notice period.

If you've already paid termination pay in lieu and the employee later claims constructive dismissal or wrongful dismissal, the payment you made will be credited toward any settlement or damages awarded.

Document resignations in writing and confirm the employee's last day of work to avoid disputes.

When does a temporary layoff become a termination?

Under the ESA, a temporary layoff becomes a termination if it exceeds:

• 13 weeks in any 20-week period, or
• 35 weeks in any 52-week period, provided the employer continues to pay benefits or makes certain other payments during the layoff

Once a layoff crosses these thresholds, it's deemed a termination, and you owe termination pay and severance pay, if applicable, as of the date the layoff began.

Plan layoffs carefully and keep track of how long they last to avoid unexpected termination obligations.