As an employment lawyer in Ontario, one of the most common questions I receive after a termination is:
“Can I collect Employment Insurance (EI) if I receive severance pay?”
The relationship between EI and severance pay in Ontario is often confusing. Employees worry about whether severance will delay their EI benefits, how to report payments, and what their rights are when negotiating a package.
In this article, I’ll explain how severance works, how it interacts with EI, and what every Ontario worker should know.
Severance Pay Meaning
In Ontario, severance pay is compensation an employer provides to an employee when their employment is terminated without cause.
It is separate from termination pay. Termination pay compensates you for the notice period you should have received under the Employment Standards Act (ESA), while severance pay is an additional entitlement owed to certain employees, provided they meet the legal criteria.
Under the ESA, you may be entitled to severance pay if:
You have worked for your employer for five years or more, and
Your employer has a payroll of $2.5 million or more, or 50+ employees are terminated within six months due to business closure.
In addition to statutory severance, many employees receive common law severance packages, which are negotiated settlements based on what courts consider “reasonable notice.” These packages often exceed ESA minimums.
How Does Severance Pay Work?
Severance can be paid in different ways, and the method of payment matters for EI purposes:
Lump-Sum Severance Pay – You receive all your severance up front as one payment.
Salary Continuance – You remain on the payroll for a period, continuing to receive your salary and benefits.
Deferred or Structured Payments – Severance is paid out in installments over a set timeline.
The form of payment affects when you can apply for EI and when benefits may begin.
EI and Severance Pay Ontario: The Key Rule
Service Canada treats severance, termination pay, and vacation pay as earnings. This means your EI benefits will not start until the period covered by these payments has ended.
For example:
If you receive 16 weeks’ worth of severance pay, EI will typically begin after those 16 weeks have passed, regardless of whether the payment was lump sum or salary continuance.
The calculation is based on how much “insurable earnings” you received, divided by your normal weekly earnings.
Lump Sum Severance Pay and EI
If you receive a lump sum severance, you might assume you can apply for EI immediately because the money was paid all at once. Unfortunately, that is not the case.
Service Canada will allocate that payment over the weeks it represents. Until that period is over, your EI benefits will not begin.
When to Apply for EI with Severance Pay
Even though your severance may delay benefits, you should still apply for EI as soon as you stop working.
Why?
Strict deadlines: You must apply within 4 weeks of your last day of work, or you risk losing eligibility.
Service Canada will determine your exact start date for EI based on your severance allocation.
Waiting to apply until after your severance runs out could result in a permanent loss of weeks of benefits.
How to Report Severance Pay on EI
When you apply for EI, you must disclose:
The type of severance (lump sum, salary continuance, etc.)
The amount received
The period it covers
Your employer will also issue a Record of Employment (ROE) to Service Canada, which shows your final earnings and any severance. Be honest and accurate in your application—misreporting can lead to repayment obligations or penalties.
Is a Severance Package Taxable?
Yes, severance packages are considered taxable income in Canada.
Lump sums: Taxes are usually withheld at source by your employer.
Salary continuance: Regular payroll deductions (income tax, CPP, EI) apply.
Retiring allowance: In some cases, severance may qualify for special tax treatment if transferred directly into an RRSP.
Because tax treatment can be complex, it’s wise to consult an employment lawyer or tax advisor before accepting a severance package.
Many employees are unsure about their severance amount, here you can calculate your severance pay If you believe your payout is too low, legal services for severance negotiations can help you fight for a fair settlement.
Key Takeaways for Ontario Employees
Severance pay is meant to compensate you for job loss, but it also delays EI because it counts as earnings.
The form of severance (lump sum or salary continuance) affects how EI calculates your waiting period.
Apply for EI immediately after your employment ends—even if your benefits won’t start right away.
Severance pay is taxable income, and structuring your package carefully can help minimize tax burdens.
Always review your severance package with an employment lawyer—what your employer offers may not reflect your full legal entitlement.
Losing your job is stressful enough without the added confusion of EI and severance pay rules. If you’ve been terminated, it’s important to understand not only how your severance affects EI, but also whether your package is fair and lawful.
In many cases, employees are entitled to much more than what their employer initially offers. Speaking with an employment lawyer early on can protect your financial future and ensure you don’t leave money on the table.
