Learn how to handle retirement severance pay in Canada. Discover HR best practices, legal considerations, and employer responsibilities for smooth transitions
An employee just turned 65. Do you:
- surprise them with a retirement party
- get their retirement severance pay ready
- all of the above
- none of the above
The answer: none of the above. The choice to retire comes from the employee, so no one should assume or pre-empt that decision. And when they do choose to retire, severance pay isn’t a legal requirement. But wouldn’t it be a fitting send-off for a loyal employee?
In this article, we’ll discuss some dos and don’ts on retirement severance pay. We’ll also go over important points for drafting a severance pay package for voluntary retirements.
What is retirement severance pay?
Retirement severance pay is a lump-sum payment given to an employee when they retire, usually to recognize their long service.
Retirement severance pay is different from regular severance pay, which usually applies when someone is let go without cause.
Retirement severance pay and retiring allowance are sometimes used in place of each other, but they are different concepts. For this article, we’ll focus on retirement severance pay: pay given to long-serving employees when they decide to retire.
Severance pay vs. retiring allowance
Severance pay is a legal entitlement, covered in certain employment standards acts (e.g., Ontario and federally regulated workplaces). It is paid to a worker who has lost their job through no fault of their own.
Retiring allowance is a tax classification under the Canada Revenue Agency (CRA). It is possible to transfer an employee’s retiring allowance to their Registered Retirement Savings Plan (RRSP), under certain conditions.
Are you required to give employees retirement severance pay?
There are no laws in Canada requiring employers to provide a severance package to workers who choose to retire.
“There is no general legal requirement for an employer to pay severance pay to an employee who voluntarily resigns from his employment,” said Tim Mitchell, a partner at McLennan Ross in Calgary. “An employee who chooses to retire, without any element of compulsion, is considered to have resigned.
“Any obligation to pay that retiring employee severance pay would have to be found in applicable legislation or an individual employment contract or collective agreement.”
Does Canada have mandatory retirement?
No, Canada does not have mandatory retirement. Compelling an employee to retire is considered age discrimination. While age discrimination isn’t mentioned in most employment laws, it is covered in the human rights acts of the different provinces and territories.
There is an exception though. Certain professions may require employees to retire at a certain age as part of a bona fide occupational requirement. Some examples are firefighters and pilots.
Dos and don’ts in employer-initiated terminations
We’ve established that there is no legal mandate on severance pay for employees who choose to retire. We’ve also seen that there is no mandatory retirement age. This means that your employees can continue working for as long as they want.
There might be situations when a company restructure or layoff will affect employees nearing retirement. Here are some points to consider when handling these cases:
Terminations without cause
If the organization needs to terminate employees without cause – and one of them happens to be of retirement age – manage this carefully.
Termination without cause is legal in Canada if:
- employers give a period of notice or pay in lieu – this varies depending on the province/territory you operate in
- employees receive severance pay – this depends on length of employment
Employers must not use termination as a pretext to remove an older employee based on age. This results in age discrimination – more on this later.
Periods of notice per province/territory
The notice periods listed below represent statutory minimums. Employees may be entitled to more under common law.
We did not go into too much detail, so we’ve included links to the respective employment or labour standards acts for further reference.
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Province/territory
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Notice periods required from employer
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Two weeks for at least three consecutive months of employment; up to eight weeks for eight years of employment or more
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One week for more than 90 days’ employment; up to eight weeks for 10 years of employment or more
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One week after three months of employment; up to eight weeks for eight years of employment or more
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One week for at least 30 days’ employment; up to eight weeks for 10 years of employment or more
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No notice required if employee retires under a retirement plan
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No notice required if the employee has reached the usual retirement age for their workplace (under section 53f)
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Notice period starts at two weeks plus one week for every year of employment over two years; maximum is eight weeks’ notice (under section 38)
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No notice period required when the employee has reached retirement age as part of a bona fide occupational requirement
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At least two weeks for less than three years’ employment plus one week for every additional year of employment; maximum is eight weeks’ notice (under section 14.03)
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At least one week if employed for less than a year; at least eight weeks if employed for eight years or more (under section 51)
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Two weeks’ notice if employed for at least six months; up to eight weeks’ notice for employment of 15 years or more (section 29)
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One week for at least three months’ employment; maximum of eight weeks for 10 years of employment or more
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One week for more than 13 weeks’ employment; up to eight weeks for more than 10 years of employment
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One week for less than two years’ employment; up to four weeks’ notice if employed for six years or more (under section 50)
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Severance pay
In general, severance pay falls under common law. Only Ontario requires statutory severance pay under its Employment Standards Act, and only in specific cases. The amount is based on length of service.
Employees may be entitled to more generous compensation under common law. This all depends on factors like age, position, and length of employment.
The appearance of constructive dismissal
When your organization does things to force or ease retirement-age employees out, that could be seen as constructive dismissal.
Constructive dismissal happens when an employer makes major changes to the terms or conditions of employment without the employee’s consent, leading the employee to resign. Some examples:
- demoting the employee
- reducing responsibilities
- cutting their pay without the employee’s consent
- refusing reasonable accommodations for health needs
- reducing training opportunities for older employees
The appearance of age discrimination
A question like “So, when are you retiring?”, if done too often and with malicious intent, can be discriminatory. Questions like this, jokes about ageing, and passive-aggressive comments can contribute to a workplace that’s unwelcoming for older employees.
This might lead them to retire, even if they had no plans to do so. This could lead to claims of age discrimination or constructive dismissal, and complaints may be filed against the organization.
Handling severance pay when employee decides to retire
We may not see too many Canadians go for this option, especially with rising inflation affecting their decision to delay retirement. Just the same, there are good reasons to have a policy on retirement severance pay:
- Fosters sense of goodwill. Let your most loyal and longest-serving employees know how much you appreciate their work. Crafting a severance package that befits their stature, tenure, and contributions will make them feel valued.
- Promotes retention among younger employees. Seeing how well you take care of all employees, regardless of age, will help attract and retain younger hires.
- Enhances your company brand. Being seen as an employer that cares for its employees – whether they’re newly onboarded or nearing retirement – makes your company a great place to work.
According to Canadian HR Reporter’s study on benefits and generational considerations, retirement benefits are top of mind for Gen X and Baby Boomers. To access the full report, sign up to CHRR+.
Best practices for structuring retirement severance packages
If you and the organization decide to give retirement severance pay, here are some steps on how to do that:
- Clarify who qualifies
- Give incentives for early notice
- Support phased retirement options
- Include non-financial support
- Include a waiver clause where appropriate
We’ll go over each of these in a moment. Meanwhile, separate guidelines are in place for retirees who leave after being terminated without cause. You should be guided by the provincial or territorial employment standards act that applies.
Here’s a more detailed look at these best practices:
1. Clarify who qualifies
Be clear that the policy is for voluntary retirees. Define the qualifying criteria, one of which is tenure minimums. You would want the retirement severance pay to serve as a reward for long-serving employees, so it’s good practice to set a minimum for tenure.
Policy details should be included in the employee handbook or individual contracts, unless they’re already part of a collective agreement.
2. Give incentives for early notice
There are guidelines on notice periods for employees based on length of employment. These are outlined in the employment standards for each province or territory.
Encourage retiring employees to let you know far in advance of their plans to resign. Consider offering enhanced packages. This helps a great deal with workforce and succession planning.
3. Support phased retirement options
Include a phased retirement option in any policy documents you’re drafting. It’s a great way to support your employees as they ease into retirement.
If your employee chooses to go with phased retirement, discuss options for claiming Old Age Security (OAS) and CPP pensions. This will help them manage their expenses during this period.
Phased retirement is a win for you, too. It will give your HR team and the employee’s manager time to recruit new staff, with enough time for a handover.
Extending a retiree’s employment period is not a bad thing especially as succession planning has been found lacking in Canadian workplaces.
4. Include non-financial support
A recent report states that over four in 10 Canadians are financially stressed. Retirement could be a stressful period – it's a major life change with a direct impact on earnings. Support this transition by offering financial planning services as part of the retirement package.
5. Include a release or waiver clause
Take this move to protect your organization from any future lawsuits from retiring employees. Signing the waiver will be a condition for receiving retirement severance pay.
This calls for a balanced approach: you need the employee to sign the waiver, but give them enough time to review it. They should be free to consult a lawyer if they prefer.
In drafting the clause, you should seek legal advice, too. Here are some experts in employment law who can guide you.
Should you offer retirement severance pay?
Because Canada does not have mandatory retirement, your employees can keep working well past retirement age. But when they decide it’s time to leave – and if they are a long-serving, valuable member of your workforce – consider offering retirement severance pay.
Employers can set how much they get and under what conditions. This type of pay is not mandated by law, so it’s entirely up to you. Just remember to outline details in writing for clarity and transparency.
Giving retirement severance pay to your most loyal employees will be an amazing send-off, a memorable way to end years of service.
Read and bookmark this section on employment law for more articles on retirement and other similar topics
