Why trying to shortchange employees on termination pay rarely ends well for companies

In the realm of employment law, one of the most common  and costly – mistakes employers make is mishandling severance packages. Despite clear legal precedent and widespread awareness, many employers still choose to lowball terminated employees or play hardball with their severance entitlements. The result? They frequently end up paying far more in the long run, both financially and reputationally.

As a Toronto employment lawyer who routinely handles these cases, I can tell you that poor severance decisions are often based on outdated assumptions, flawed legal advice, or an unrealistic hope that the employee will not fight back. In reality, that gamble almost always fails.

The Legal Standard for Severance: It Is About More Than Just Time

When an employer decides to end an employment relationship, the law in Ontario – and across Canada – requires that the employee be provided with reasonable notice or pay in lieu of notice. This isn’t just a guideline; it is a legal requirement rooted in the idea that employees depend on their jobs for financial security and stability. Courts have long acknowledged that the balance of power in employment relationships tilts heavily toward the employer.

As a result, the law leans in favour of the employee when it comes to interpreting employment contracts and determining severance entitlements. In cases of ambiguity or vague language, courts almost always side with the employee. That is one reason employers must be extremely careful when drafting contracts – something a knowledgeable employment contract review lawyer can help them with.

Employment Contracts Are Not Like Business Agreements

It is a common misconception among employers that employment contracts function like any other commercial agreement—like those with vendors or service providers. But employment law operates under a different framework. The courts treat employment contracts differently because of the inherent power imbalance between employer and employee.

Any unclear language in a contract is interpreted against the employer. More importantly, any clause that seems to contravene the Employment Standards Act (ESA) – even indirectly – can be rendered legally unenforceable. This means employers must go beyond the ESA minimums if they want to avoid liability, especially for long-service employees or those in senior roles.

A well-drafted contract is a valuable tool, but only if it complies with current employment law standards. Having an employment contract review lawyer involved during the hiring phase can prevent major headaches later.

Severance Must Include the Full Compensation Package

When providing severance, employers are obligated to include all components of the employee’s compensation, not just base salary. This includes:

• Health and dental benefits

• Bonuses and commissions

• Stock options and restricted share units (RSUs)

• Vacation pay

• Pension contributions and RRSP matching

• Any other perk or benefit the employee would have received had they worked through the notice period

This principle is well-established in Canadian case law, yet many employers still try to offer severance packages that only account for base pay. This is not just inadequate – it is legally risky.

If you’re uncertain whether your severance package includes all your entitlements, it is prudent to speak with a severance package review lawyer before signing anything. Once you sign, you may waive important rights.

Notice Periods Are Getting Longer – And Courts Are Backing It

Until recently, the upper limit for common law notice periods in Ontario was considered to be around 24 months for long-serving employees. However, in several recent rulings, courts have awarded notice periods longer than 24 months – especially in cases where the employee was older, held a senior position, or had limited prospects for re-employment.

This shift reflects a broader trend: the courts are becoming increasingly employee-friendly. As a constructive dismissal lawyer, I’ve seen cases where prolonged job searches, especially after being pushed out of a role without formal termination, resulted in significant compensation.

Employers who cling to outdated assumptions about the “maximum” notice period are playing with fire. Courts now look at the full picture: age, length of service, position, and the employee’s chances of finding comparable work.

So Why Do Employers Still Try to Offer Less?

Despite all this legal clarity, some employers continue to take the risk. Why?

• Cost savings: The most obvious reason. Employers hope to minimize payouts.

• Assumed ignorance: Some assume the employee won’t consult a lawyer or won’t understand their rights.

• Litigation deterrence: They bet the employee won’t pursue a claim due to the cost and time of legal action.

• Misguided advice: Employers sometimes receive poor legal advice or rely on outdated policies.

Unfortunately for them, this gamble often backfires. More employees than ever are informed and proactive. Even those who aren’t will often be advised by someone to contact a wrongful dismissal lawyer – and once that happens, the game changes.

When Employers Get It Wrong: The Cost of a Bad Severance Offer

Let’s say an employer offers a terminated employee eight weeks of base salary – nothing more. The employee consults a severance package review lawyer and learns they’re entitled to 12 to 18 months of full compensation, including bonuses and benefits.

What happens next?

• The employee files a claim.

• The employer is forced to hire external legal counsel.

• The company ends up paying what they should have paid in the first place – plus the employee’s legal fees.

• In some cases, courts even award additional damages for bad faith conduct or the employer’s failure to act honestly and transparently.

If the employee was treated particularly poorly – publicly dismissed, falsely accused of misconduct, or terminated without explanation – the employer may also face aggravated or punitive damages. These damages can add tens of thousands of dollars to a settlement.

In many of our own cases, employers eventually realize their error – but only after wrongful dismissal litigation has begun. At that point, it’s too late to avoid additional costs. Ironically, if they had made a fair offer from the start, most employees would have accepted it, and everyone would have saved time and money.

Sophisticated Employers Still Make These Mistakes

What is surprising is that these errors are not limited to small businesses or start-ups. We have represented clients against major corporations – banks, multinationals, publicly traded firms – and still encountered severance offers that were well below legal ESA standards.

In several of these cases, the employers eventually retained skilled outside counsel who, after reviewing the situation, agreed that the original severance offer was inadequate. Settlement discussions followed, and our clients received significantly more than what was initially on the table.

Had the company sought sound advice from the beginning, the entire workplace conflict could have been avoided, such as a wrongful dismissal claim or constructive dismissal claim.

What You Should Do if You’re Let Go From Your Job in Ontario

If you have been terminated – or are facing a termination of employment – it is important not to panic or sign anything under pressure. Here are the steps we recommend:

1. Take your time – You do not need to sign a severance offer immediately. You are entitled to time to review it.

2. Gather your documents – This includes your employment contract, offer letter, performance reviews, bonus plans, and benefits details.

3. Consult an Experience Ontario Employment Lawyer – A quick review by a Toronto employment lawyer or severance package review lawyer can save you from losing tens of thousands of dollars.

4. Do Not be intimidated by “cause” allegations – Many employers claim “just cause” without merit. A wrongful dismissal lawyer can help you challenge an unfair dismissal.

Conclusion: A Reasonable Offer Upfront Saves Everyone Trouble

Severance packages should be fair, complete, and in line with current employment legal standards. When employers try to shortchange an employee, they rarely succeed. Ontario employment law favours fairness and has mechanisms in place to penalize underhanded tactics.

Employers who fail to understand this end up paying more – not only financially, but in legal exposure and reputational damage. A fair severance offer isn’t just the right thing to do; it is smart risk management.

If you have been let go from your job, do not accept less than you deserve. Whether you need a wrongful dismissal lawyer, a constructive dismissal lawyer, or a Toronto employment lawyer, sound legal advice can make all the difference in protecting your rights and securing your future.