Canadian employment contracts often include severance clauses that limit what you'll receive if terminated. Many clauses purport to meet statutory minimums but actually provide less than what employment law entitles you to. For example, an Ontario contract might state severance is 'two weeks' pay' even though the Employment Standards Act entitles you to more. Courts have found many severance clauses unenforceable because they undermine statutory rights. Additionally, severance clauses often require you to waive claims against the employer—including wrongful dismissal and discrimination claims—in exchange for severance pay. Before signing an employment contract, you need to understand your statutory severance entitlements and whether the contract's severance clause meets or exceeds them.
What is a Severance and termination pay?
A severance clause in an employment contract specifies what you receive if your employment is terminated without cause. It typically includes a notice period, pay in lieu of notice, and sometimes additional severance pay. However, the clause must comply with provincial employment standards (which guarantee minimum severance amounts) and cannot undermine statutory rights or include unjust conditions like confidentiality or non-disparagement obligations.
Red flags to watch for
Ontario's Employment Standards Act provides minimums, but common law entitlement is often higher (up to 2 years' pay for wrongful dismissal). A clause limiting you to statutory minimums may be unenforceable.
Some contracts state: 'In exchange for severance pay, you waive all claims for wrongful dismissal.' Courts often find this unenforceable if it requires waiving claims for breaches of the employment contract itself.
Tying severance to an agreement not to criticize the company or disclose reasons for termination may be unenforceable and could breach public policy (e.g., if you were terminated for reporting misconduct).
If the severance clause excludes bonuses or commissions earned during the notice period, it may undervalue your entitlement. Courts often include these in wrongful dismissal calculations.
Ambiguity about whether severance includes notice pay (or if you'll receive notice and severance separately) creates uncertainty. Ensure clarity on total severance amount.
Some clauses require you to 'mitigate' by finding new work, with severance reduced by income earned elsewhere. This shifts the burden to you and may be unfair.
Your legal rights
Canadian employment law (provincial standards) sets minimum severance. Ontario's Employment Standards Act requires notice periods and termination pay based on length of service (2 weeks to 8 weeks). However, common law (wrongful dismissal) typically entitles employees to much more (up to 2 years' pay depending on age, position, and availability of similar work). Employment contracts that limit severance below statutory minimums are unenforceable. Clauses requiring waivers of statutory rights are typically void. Courts scrutinize severance clauses to ensure they don't circumvent employment protections.
Questions to ask before you sign
- 1If I'm terminated without cause, what severance am I entitled to under this contract?
- 2Is severance paid in addition to notice pay, or does notice satisfy the severance obligation?
- 3What is included in severance calculations (base pay, bonuses, commissions, benefits)?
- 4Must I sign any waivers (non-disparagement, confidentiality, non-competition) to receive severance?
- 5If I find alternative employment, is my severance reduced by income earned elsewhere?
- 6How does my severance compare to what employment law guarantees in this province?
- 7If I believe the severance is unjust, what recourse do I have?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.