Chapter 7 – Payroll Obligations on Termination of Employment
Is Employment Actually Terminated? Layoffs vs. Termination
Not every work stoppage counts as a termination for payroll purposes. A layoff where the employer genuinely intends to recall the employee is not treated as termination, and several specific layoff situations are excluded from triggering termination obligations altogether: a layoff caused by a strike or lockout, a layoff lasting three months or less, and in many jurisdictions a layoff lasting up to twelve months where the employee retains recall rights under a collective agreement. Once an employer lays an employee off with no intention of recalling them, however, that layoff is legally treated as a termination, and the full set of termination obligations – final pay, notice or pay in lieu, and a Record of Employment – applies just as it would for an outright dismissal.
Termination With Cause vs. Without Cause
Termination with cause occurs when an employer ends the employment relationship because of the employee’s own misconduct or serious performance failure, and it requires the employer to demonstrate justifiable, evidence-backed reasons – the specific standard for what counts as sufficient cause varies by province, but generally requires that the employee understood the expected standard of conduct, was warned about the consequences of continued misconduct, and was given a fair opportunity to correct the problem before termination. When cause is established, the employer is not required to provide notice or pay in lieu of notice, though the employee is still owed their final wages, any accrued vacation pay, and other outstanding entitlements. Termination without cause covers everything else – layoffs, restructuring, or a decision simply to end the relationship for reasons unrelated to employee conduct – and here the employer must provide notice, pay in lieu of notice, or some combination of the two, with the required amount set by the applicable provincial, territorial, or federal legislation.
Notice and Pay in Lieu of Notice
Every Canadian jurisdiction sets minimum notice periods (or equivalent pay in lieu) for termination without cause, and the required length scales with the employee’s length of service, typically starting around one week of notice for a new employee and rising in stages to a cap – often eight weeks – once an employee has been with the organization for many years. The exact schedule of weeks by tenure differs from province to province and territory to territory, so payroll must apply the specific schedule for the jurisdiction where the employee works rather than assuming one province’s rule applies elsewhere. Where an employer chooses to skip the working notice period and instead pay the employee out immediately, that payment – pay in lieu of notice – is calculated as the wages the employee would have earned during the notice period had they continued working it, based on their regular rate of pay.
Other Compensation Owed on Termination
Beyond notice or pay in lieu, several other amounts commonly come due when employment ends. Accrued vacation pay covers any vacation entitlement the employee earned but had not yet taken or been paid for, calculated by applying the jurisdiction’s vacation pay rate to vacationable earnings for the relevant period (regular wages and eligible allowances, generally excluding overtime, bonuses, and commissions unless the jurisdiction says otherwise). Severance pay is a distinct entitlement in several jurisdictions, typically triggered by termination without cause after a substantial period of service, intended to recognize years of service rather than to substitute for notice. A retiring allowance is a related but separate category paid in recognition of long service or in respect of loss of employment, and it excludes items such as regular wages, pension benefits, and accrued vacation pay – critically, CPP contributions and EI premiums are not deducted from a genuine retiring allowance, since it is not treated as regular insurable or pensionable earnings the way ordinary wages, vacation pay, and pay in lieu of notice are.
Group Termination Rules
When an employer terminates a large number of employees at a single location within a short window – commonly defined as 50 or more employees within a four-week period – special group termination rules apply on top of the individual notice requirements. A federally regulated employer conducting a group termination must give written notice to the government’s labour compliance authority well in advance (16 weeks under the Canada Labour Code), cooperate with the Employment Insurance Commission, provide affected employees a statement of benefits, and establish a Joint Planning Committee tasked with developing an adjustment program – potentially including early retirement offers, internal reassignment, or job-search assistance – to reduce the impact on affected staff. Non-federally regulated employers face similar group termination notice obligations, but the employee-count thresholds and required notice periods are set independently by each province and territory and can differ substantially from the federal standard.
Worked Example: Calculating Net Pay on a Termination Payment
Consider Malik, who works for Advantage Corp in Ontario, earning an annual salary of $68,900.00 paid biweekly. His employment is being terminated without cause, and he is entitled to 4 percent vacation pay on vacationable earnings of $71,500.00, plus four weeks’ wages in lieu of notice, both paid together as a single separate payment apart from his regular pay. His vacation pay is 4 percent times $71,500.00, or $2,860.00. His weekly wage rate is $68,900.00 divided by 52, or $1,325.00, so four weeks’ pay in lieu of notice is 4 times $1,325.00, or $5,300.00. The total separate payment is $2,860.00 plus $5,300.00, or $8,160.00. Because vacation pay and pay in lieu of notice are treated as insurable and pensionable earnings (unlike a genuine retiring allowance), CPP and EI still apply: at 5.95 percent, CPP on this payment is $8,160.00 times 5.95 percent, or $485.52, and at 1.66 percent, EI is $8,160.00 times 1.66 percent, or $135.46. Income tax on an irregular lump-sum payment like this is calculated using the CRA’s bonus method, which annualizes regular pay with and without the lump sum to isolate the incremental tax on the payment itself; for illustration, applying an approximate combined federal and provincial rate of 25 percent (a simplification of what the bonus method calculates precisely) produces estimated income tax of $8,160.00 times 25 percent, or $2,040.00. Total deductions are $485.52 plus $135.46 plus $2,040.00, or $2,660.98, leaving Malik with a net separate payment of $8,160.00 minus $2,660.98, or $5,499.02.
The Record of Employment (ROE)
An employer must issue a Record of Employment for every employee whose employment ends or whose earnings are interrupted, since the ROE is the document Service Canada uses to determine that individual’s eligibility for Employment Insurance benefits. Preparing an ROE involves entering administrative information about the employer and employee, the period of employment covered, the employee’s total insurable hours and insurable earnings for that period (including any insurable separation payments such as pay in lieu of notice, which must be added into the final pay period’s total), and the specific reason the ROE is being issued. Because insurable earnings on the ROE must include amounts like vacation pay and pay in lieu of notice but exclude a genuine retiring allowance, correctly classifying each termination payment before completing the ROE is essential to avoid under- or over-reporting the employee’s insurable earnings.
Quick Revision Summary
A layoff only counts as termination once the employer has no intention of recalling the employee; short layoffs and strike- or lockout-related layoffs generally do not trigger termination obligations. Termination with cause requires no notice but still requires final wages and accrued entitlements; termination without cause requires notice, pay in lieu, or a combination, scaled to length of service under the applicable jurisdiction’s legislation. Vacation pay, severance pay, and pay in lieu of notice are all commonly owed on termination, while a genuine retiring allowance is a separate category that, unlike the others, is not subject to CPP or EI. Group terminations (typically 50 or more employees within a four-week window) trigger additional notice, statement-of-benefits, and Joint Planning Committee requirements beyond individual notice rules. On a termination’s final payment, CPP and EI apply to insurable amounts like vacation pay and pay in lieu of notice, income tax on the lump sum is calculated using the CRA’s bonus method, and an ROE must be issued reflecting the employee’s final insurable hours and earnings.