Unfortunately, it’s necessary to know how to terminate a contract correctly and accurately compensate employees for companies of all sizes. When calculating contract termination details like severance pay in Canada, you should be able to end your relationship with employees in full legal compliance to avoid potential lawsuits for wrongful termination.
Canada has much stricter employment protection laws than many countries. Each province also has slightly different regulations for termination notice periods and compensation. Understanding these labor laws will keep your company secure and in line with best business practices.
In this article, we explain the relevant laws and the steps you need to take when ending an employment contract in Canada.
How to Dismiss an Employee in Canada
In most cases, employers must give a minimum of two weeks’ notice before termination.
However, in place of notice, employers can give two weeks’ salary as compensation or payment in lieu.
If an employee works for a company for less than one year, a necessary notice period only needs to be one week. There is no difference between full-time and part-time employees in this situation according to most Canadian provinces.
Just cause dismissals do not require the two weeks notice period. However, they are only applicable when the employee has demonstrated extreme misconduct or violates the contract terms. An employer should be able to provide documentation or proof of this misconduct before dismissing the employee.
Dismissing employees with just cause means they are not eligible for severance pay.
Collective Dismissal in Canada
In the case of collective dismissals, the employer must give 4-16 weeks of notice, depending on the region and the number of employees. The employer also needs to inform the relevant labor office before progressing.
In some jurisdictions, employers must issue both a collective dismissal announcement and individual dismissal forms to each employee.
All employees in a collective dismissal are given compensation unless it was because of just cause.
Severance Pay in Canada
Severance payment ranges from 5 to 40 days, depending on the time spent with the company and the local labor laws in each province.
Best practice suggests that potential amounts of severance pay should be put in the contract, including common termination clauses. This is the simplest way to avoid potential problems later on.
The Canadian federal mandate is 2 additional days of severance pay for each year of employment, starting at a minimum of 5 days.
Is Severance Pay Taxed in Canada?
Severance pay is subject to tax at the same rate as personal income. You can find information on Canadian income taxes here.
If employees receive their severance pay as a lump sum, the employer will deduct income tax first.
Should the employee wish to receive their severance pay into their Registered Retirement Savings Plan (RPSP), they must deduct income tax whenever they withdraw it from their pension account.
How Difficult is to Safely Terminate an Indefinite Contract in Canada?
In Canada, where there are many rules protecting employees, employee termination laws are stringent. When firing employees, employers must use caution to maintain legal compliance. Since most of these issues resolve at the provincial level, there is a lot of room for differences. However, employee contracts should still expressly indicate the likely causes, notice time, and expected severance package.
It’s always best that the employee agrees to the end of their contract, as this can avoid potential disputes going forward.
Employers must typically offer at least two weeks’ notice before terminating an employee. Employers may instead choose to compensate employees with two weeks’ worth of pay in lieu of notice. The necessary notice period is one week if the worker hasn’t been with the company for a full year.
Just cause terminations don’t require either the two-week notice requirement or severance pay. However, this is only for when an employee commits grave misbehavior or violates a specific contract clause. These situations may include when an employee discloses trade secrets , gives confidential information to a competitor, or repeatedly breaks their terms of employment.
In Canada, collective terminations must be followed by individual notification and notification to the relevant labor board during a termination meeting.
Depending on the terms and conditions of employment and the provincial labor rules, severance compensation can range between 5- and 40-days wages. The minimum requirement set by the federal government is 5 days, with 2 additional days for each year of employment. This is then subject to personal income tax.
Let INS Global Help Manage HR Functions for Your Employees in Canada
Recruiting, hiring, and training the best employees is key to global expansion. However, knowing how to terminate contracts properly should also not be taken lightly. When you fail to dismiss an employee correctly, you can risk lawsuits damaging your company’s reputation and costing you significantly.
It isn’t easy to keep up with all the local laws and bills in a new country. That’s where our legal advisors can make your experience easier by handling everything with professionalism and expertise.
Our global HR and payroll services can ensure that your employees or independent contractors are taken care of with full legal assurance and expertise.
INS Global offers services in over 80 countries, and we have more than 15 years of experience working with companies across industries. With our PEO or EOR as your partner, you can set up quickly in Canada and avoid any expensive mistakes.
Our counselors are committed to ensuring that all your HR needs are met. From managing health insurance, sick leave, and vacation time, to employment agreement formation, want to give you a swift and problem-free expansion experience.