Getting laid off unexpectedly carries with it some decision challenges, not least managing your severance money, since it needs to sustain you financially. How do you manage your money and make it last? Read along as financial expert Adeola walks our reader, Selena, through how to handle her severance pay.
The question
Hi Experts,
Sadly, I was just laid off from where I had been working for the past 6 years. I’ve never been laid off before, so I have no idea if the severance pay I’ve been offered is reasonable. They’ve offered 20 weeks plus vacation pay accrued. How do I make it last? Anything, in particular, I should be considering or doing to make this whole thing easier?
Thank you!
Selena M
The question
What is severance pay?
First, let’s explain what severance pay entails. Severance pay is compensation that some employees receive when they are terminated without cause. The purpose is to help bridge the gap between jobs, giving you financial security while you find new employment. Severance pay is different from regular wages or notice pay. It is governed by federal and provincial laws, including the Canada Labour Code, Employment Standards Act (ESA), and the Employment Standards Code (ESC).
Who is eligible for severance pay?
Eligibility depends on your province, your employment contract, and how long you’ve worked for your employer.
In general, you may be entitled to severance if:
- You’re a full-time employee (sometimes part-time employees qualify, too).
- You’ve worked for a certain period (often at least 12 months).
- You’ve been terminated without cause (not for misconduct).
- Your employer meets specific criteria under the Employment Standards or the Canada Labour Code.
Some industries and jobs have unique rules, so always check your province’s employment standards or consult an employment lawyer for legal advice.
How is severance pay calculated in Canada?
Severance pay can be paid as a lump sum or as salary continuance over a set notice period. The amount is usually based on your basic pay, length of service (often measured in calendar days or years), age, and sometimes your position. Severance can also include accrued vacation pay, unpaid bonuses, and other benefits.
Three main ways severance is calculated
Minimum Standards (ESA or Canada Labour Code)
Most provinces set a minimum severance requirement. For example, Ontario’s ESA generally provides one week’s pay per year of service, up to a maximum.
Common Law
In many cases, courts award more generous packages based on factors like job market conditions, age, and length of service. This is often much more than the legal minimum.
Employment Contract
Your contract may outline a specific formula or severance package. If it’s less than the law requires, the law wins.
Tip: Use a severance pay calculator or consult an employment lawyer to estimate what you are owed.
What should a severance package include?
A fair severance package can include:
- Severance pay (lump sum or salary continuance)
- Accrued vacation pay
- Unpaid bonuses or commissions
- Continuation of benefits (health, dental, pension plan, etc.)
- Outplacement or career transition services
- Payment for unused sick days (in some cases)
- Written reference letter (optional, but helpful)
Always request a breakdown of your severance payment and clarify how each item is calculated.
Understanding severance pay and the law
Canadian employment law is complex. Severance pay is governed by a mix of federal law (Canada Labour Code), provincial employment standards (ESA, Employment Standards Code), and common law. Here are some essentials:
Notice period: Employers must give you advance notice or pay in lieu of notice when terminating employment.
Working notice: Sometimes, you’ll be asked to work during your notice period. Other times, you’ll receive a lump sum payment and leave right away.
Wrongful dismissal: If you believe your severance package is unfair—or you were terminated without proper notice—contact an employment lawyer or seek legal aid.
Your employer may also include non-compete clauses and other restrictions in your package. Review these with a legal professional before signing.
How to make your severance pay last
A lump sum severance payment can feel like a windfall, but it needs to last until you find your next job. Here’s how to stretch your funds:
Pause and plan
Don’t rush into big purchases or financial commitments. Take time to assess your situation and create a budget.
Calculate your monthly needs
Add up your essential expenses—rent or mortgage, utilities, groceries, transportation, insurance, and debt payments. Use a pay calculator to estimate your after-tax income.
Prioritize debt and bills
If you have credit card debt, consider making minimum payments to protect your credit score. Explore options for managing debt while unemployed.
Cut non-essential spending
Review your subscriptions, dining out, and entertainment expenses. Small cuts add up and help your severance pay last longer.
Consider lump sum vs. salary continuance
A lump sum payment gives you all your severance at once, while salary continuance means you receive regular paycheques for your notice period. Each has tax and financial planning implications. Speak with a financial advisor to choose what’s best for you.
Understand tax implications
Severance pay is usually taxed at source, but you may owe more (or get a refund) when you file your taxes. Consider setting aside extra for tax time.
Apply for employment insurance (EI)
You may be eligible for EI after your severance runs out. Learn about employment insurance benefits here.
What else should you consider after a layoff?
Review your employment contract and package
Check for any non-compete or non-solicitation clauses, pension plan details, and benefit extensions. Consult an employment lawyer if you’re unsure about your rights.
Get legal advice
If you’re not sure whether your severance package is fair, get a second opinion. Many employment lawyers offer free or low-cost consultations. They can help you understand your rights under the Canada Labour Code, Employment Standards Act, or common law.
Update your resume and start networking
Begin your job search as soon as you’re ready. Consider reaching out to recruiters, updating your LinkedIn profile, and networking with industry contacts.
Protect your finances
If you’re worried about bills or debt, develop an action plan and learn how to manage your finances after a layoff.
Monitor your benefits
Check when your health, dental, and pension benefits end. You may need to arrange private coverage or transfer your pension plan.
Severance pay: Key terms and FAQs
Here are some severance pay key terms to know when navigating a job loss:
Severance pay calculator: Online tool to estimate your entitlement.
Notice period: The length of time you are given notice before your job ends.
Lump sum: Severance paid all at once.
Salary continuance: Severance paid as ongoing salary.
Employment standards: Provincial or federal rules governing employment.
Working notice: When you work through your notice period instead of leaving right away.
Wrongful dismissal: Being fired without proper notice or fair severance.
Special considerations: Pension, CPP, and PayPal
Pension plan: Ask about your options for transferring or cashing out your pension.
CPP (Canada Pension Plan): Your employer should issue a Record of Employment (ROE) for EI and CPP purposes.
PayPal or other payment platforms: If you received pay through non-traditional means, clarify how it is included in your severance calculation.
What if you suspect wrongful dismissal?
If you were terminated without cause and your severance pay seems low, or you believe you were let go for discriminatory reasons (violating human rights), consult an employment lawyer immediately. They can review your notice and package, check for violations of the Employment Standards Act or Canada Labour Code, and help you seek fair compensation.
Take control of your next steps
Losing your job is tough, but understanding your rights and making smart decisions about your severance pay can help you land on your feet. If you’re feeling overwhelmed, learn how to manage your finances during a career change or read our action plan for layoffs.
- Don’t rush to sign anything—get legal advice if you’re unsure.
- Plan your finances carefully so your severance package lasts.
- Reach out for support—whether it’s legal, financial, or emotional.
- Don’t wait to apply for EI.
Always remember you have rights as an employee, and you deserve fair treatment. Take your time, get informed, and make the choices that are best for your future.
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