Statutory severance pay, and what an asset buyer inherits

SECTION 01 OF 09

What the Act counts as a severance

Section 63, marginal note What constitutes severance, lists five triggers, not one. Subsection (1) opens “An employer severs the employment of an employee if,” and clause (a) is the ordinary case — “the employer dismisses the employee or otherwise refuses or is unable to continue employing the employee”.

The others catch owners out. Clause (b) reaches constructive dismissal — “the employer constructively dismisses the employee and the employee resigns from his or her employment in response within a reasonable period”. A post-closing reorganisation stripping a manager’s duties can therefore sever an employment nobody thought ended (changing job titles). Clause (c) severs on a long lay-off, amended effective 27 November 2025, and clause (d) on a permanent discontinuance — so a lay-off running at closing has a clock on it, and the buyer is the employer when it expires (an inherited lay-off).

SECTION 02 OF 09

Section 64: two doors, one shared condition

Section 64(1): “An employer who severs an employment relationship with an employee shall pay severance pay to the employee if the employee was employed by the employer for five years or more and,” then clause (a), “the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result”, or clause (b), “the employer has a payroll of $2.5 million or more”.

Five years is the shared condition; the clauses are alternatives. A small firm can dismiss a twenty-year employee and owe nothing under this section; a mid-sized firm owes on a five-year employee dismissed alone (Treadstone Law draws the same split).

SECTION 03 OF 09

The payroll test, and the word the Act does not use

Section 64(2) gives two measurements, either of which satisfies the threshold: “the total wages earned by all of the employer’s employees in the four weeks that ended with the last day of the last pay period completed prior to the severance of an employee’s employment, when multiplied by 13, was $2.5 million or more”, or “the total wages earned by all of the employer’s employees in the last or second-last fiscal year of the employer prior to the severance of an employee’s employment was $2.5 million or more”. They are alternatives, so running one, finding it short and stopping proves nothing.

Now the wording that gets misquoted. The Act says only “the employer has a payroll of $2.5 million or more”, and counts “all of the employer’s employees” with no geographic limit. The word global appears nowhere in it — zero occurrences across the 86,550-word consolidated Act. The Ministry of Labour supplies it: the ESA guide states the test as a “global payroll of at least $2.5 million”. Cite that as the Ministry’s reading, not as the provision.

SECTION 04 OF 09

Who is prescribed out

Section 64(3) reads “Prescribed employees are not entitled to severance pay under this section”, and O. Reg. 288/01 s.9(1) does the prescribing. The list is narrow. Paragraph 6 excludes “An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Paragraph 4 excludes “An employee whose employment is severed after refusing an offer of reasonable alternative employment with the employer.”

Note with the employer. On a share purchase the employer is unchanged; on an asset purchase the offer comes from a different legal person, and neither the Act nor the regulation says whether a purchaser’s offer counts. That gap is not filled here with a guess. Paragraph 2 removes an employee “whose contract of employment has become impossible to perform or has been frustrated”, but subsection (2) takes most of that back where the cause is “an illness or injury suffered by the employee” — so a disability case is usually still owed.

SECTION 05 OF 09

Section 65: the arithmetic

Section 65(1) is a formula, not a discretion: “Severance pay under this section shall be calculated by multiplying the employee’s regular wages for a regular work week by the sum of, (a) the number of years of employment the employee has completed; and (b) the number of months of employment not included in clause (a) that the employee has completed, divided by 12.” A week per completed year, plus a twelfth per completed month.

Section 65(2) widens the base: “All time spent by the employee in the employer’s employ, whether or not continuous and whether or not active, shall be included in determining whether he or she is eligible for severance pay under subsection 64 (1) and in calculating his or her severance pay under subsection (1).” Section 65(4) adds back unserved notice; section 65(5) is the only ceiling, at “regular wages for a regular work week for 26 weeks”. On parameters of my own choosing rather than data — $1,500 a week, eleven years and seven months — that is 11.58 weeks, or $17,375, on top of notice (calculated separately).

SECTION 06 OF 09

Why this is not common-law reasonable notice

These are different legal objects, and this hub keeps them apart: reasonable notice is the subject of common law notice exposure in Ontario. What matters for pricing a deal is that section 65(7) makes severance “in addition to any other amount to which an employee is entitled under this Act or his or her employment contract” — additive by statute, not absorbed into a larger award; section 65(8) permits only three set-offs.

Section 5(1) voids any contracting out or waiver of an employment standard, and section 8(1) preserves the parallel claim: “Subject to section 97, no civil remedy of an employee against his or her employer is affected by this Act.” But the employee must choose a forum. Section 97(2): “An employee who files a complaint under this Act alleging an entitlement to termination pay or severance pay may not commence a civil proceeding for wrongful dismissal if the complaint and the proceeding would relate to the same termination or severance of employment.” Treadstone Law compares the two on termination pay versus severance pay, and explains why a void termination clause moves the exposure to the common law.

SECTION 07 OF 09

What continuity of employment hands the buyer

Section 9(1) makes this a transaction problem: on a sale, an employee the purchaser hires has employment with the seller “deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment”. Its mechanics — the 13-week exception, what counts as a sale, why a share purchase escapes it — are in what happens to the staff when the business is sold.

Its effect on severance is double: combined service meets the five-year condition in section 64(1) and is the multiplier in section 65(1). The test that changes hands is the payroll one, and it moves in the buyer’s direction — section 64(1)(b) asks whether “the employer” has the payroll, measured at “the last day of the last pay period completed prior to the severance”, when the employer is the purchaser. The Ministry’s continuity chapter reads it the same way, resting its worked example on the fact that “her new employer’s payroll is greater than $2.5 million annually”. An employee of a seller too small ever to have qualified therefore becomes a severance case the day a larger group becomes the employer (asset-purchase severance liability).

SECTION 08 OF 09

When it is payable, and by whom

Severance pay is wages: the section 1 definition captures “any payment required to be made by an employer to an employee under this Act”, which pulls it into section 11(5) — payment falls due “not later than the later of, (a) seven days after the employment ends; and (b) the day that would have been the employee’s next pay day”. Section 66 permits instalments over at most three years, and subsection (3) is the trap for a buyer stretching one through a tight first year: “If the employer fails to make an instalment payment, all severance pay not previously paid shall become payable immediately.”

One liability the ESA does not extend is to directors personally. Section 81(3): “The wages that directors are liable for under this Part are wages, not including termination pay and severance pay as they are provided for under this Act or an employment contract”. Severance stays with the corporate employer; its tax characterisation is a separate question.

SECTION 09 OF 09

Sizing it before you sign

Regulator-led recovery has a two-year tail: section 96(3) deems a complaint about a contravention more than two years old not to have been filed, and section 111(1) bars an officer from ordering wages that “became due more than two years before the complaint was filed”. The civil claim preserved by section 8(1) is not.

The diligence is arithmetic. List every employee at or past four years of combined service at the expected closing date, since section 9 credits the seller’s years. Run both section 64(2) tests on the post-closing employer, including businesses section 4 treats as one. Then price the worst case: eight weeks of notice plus severance to the 26-week ceiling is 34 weeks of regular wages for one long-service employee — $51,000 on the $1,500 figure above, before a common-law dollar. Allocation is a drafting question (pre-closing severance, undisclosed liabilities).

All of this is Ontario law. Section 3(2) provides that the Act “does not apply… if their employment relationship is within the legislative jurisdiction of the Parliament of Canada”, and the federal equivalent, Canada Labour Code section 235, has no payroll threshold at all: it reaches any employee “who has completed twelve consecutive months of continuous employment” and pays the greater of two days’ wages per completed year and five days’ wages.