7.4 Compensation upon Termination of Employment

7.4.1 Accrued Vacation Pay

Calculating vacationable earnings for the purpose of paying out accrued vacation pay varies slightly between provinces and territories. However, the general approach involves calculating vacationable earnings based on the employee’s regular wages or salary (or according to the employment contract if the agreement exceeds the legislative requirements). The following is a general method used to calculate vacationable earnings:

1. Determine the period for which you are calculating vacationable earnings.
2. Exclude earnings that are not considered vacationable, such as overtime pay, bonuses, or commissions.
3. Include the employee’s regular wages or salary for the earnings period.
4. Include additional payments that are considered vacationable earnings. This might include certain allowances or shift differentials. Check with the provincial or territorial employment standards to determine which additional payments should be included.
5. Determine and apply the applicable vacation pay rate based on the provincial or territorial employment standards.
6. Calculate the accrued vacation pay by multiplying the total vacationable earnings by the applicable vacation pay rate to determine the accrued vacation pay owed to the employee.

7.4.2 Pay in Lieu of Notice

Pay in lieu of notice refers to the compensation provided by an employer to an employee when the employment relationship is terminated without cause and the employer chooses to end the employment immediately without providing the employee the required notice period (see the table “Individual Employee Termination Notice by Province and Territory” in section 7.3 Termination of Employment). When an employer provides pay in lieu of notice, it means that the employer pays the employee a lump sum equivalent to the wages they would have earned during the notice period instead of providing advance notice of termination. The amount of pay in lieu of notice is based on the employee’s length of service or employment contract. The applicable provincial or territorial employment standards legislation sets out the minimum notice periods in lieu of notice when terminating without cause.

7.4.3 Severance Pay

Severance pay is a form of compensation provided to employees when their employment is terminated, usually due to reasons beyond their control such as layoffs, company downsizing, or company restructuring. Severance pay is meant to provide financial assistance to employees and recognize their years of service.

Entitlement to severance pay varies depending on the employment standards legislation in the respective province or territory, length of service, and the terms of the employment contract. The employment contract may stipulate more than the employment standards legislation, but not less. Severance pay is not typically paid to employees who were terminated with just cause, and employees in a union may have severance pay provisions outlined in their collective agreement.

7.4.4 Retiring Allowance

Retiring allowances are a form of severance paid to employees when or after they retire in recognition of long service or for the loss of employment. According to the Government of Canada (2024), retiring allowances include payments for uninsured sick-leave credits on termination and amounts individuals receive upon termination, including amounts for damages in the case of wrongful dismissal litigation.

A retiring allowance may be paid over one or more years or transferred into a registered retirement savings plan (RRSP) or retirement savings plan (RSP). If the retiring allowance is transferred, it cannot exceed the employee’s eligible portion of retiring allowance minus the portion transferred in a prior year (Government of Canada, 2024).

7.4.5 Other Payments

There are potentially other payments due to an employee when employment is terminated. If an employee has incurred any work-related expenses not reimbursed, they may be entitled to be reimbursed for those expenses. If the employee participated in a pension or retirement plan, there may be obligations to continue making contributions or provide a payout. Lastly, if the employee holds stock options or equity in the company, there may be provisions regarding the option or equity upon termination, which may include cashing out the options.

Specific entitlements and payments upon termination of employment can vary depending on the province or territory of employment, the employment contract, or the collective agreement. Employers and employees are responsible for ensuring compliance with the specific requirements accordingly.

References

Government of Canada. (2024). Transfer a retiring allowance. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/completing-filing-information-returns/t4-information-employers/special-situations/transfer-a-retiring-allowance.html

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