In Ontario, true statutory severance and retiring allowances are not considered insurable earnings and are exempt from WSIB premiums. However, regular wages paid during a “working notice” period, or pay in lieu of notice, generally are subject to WSIB premiums.
Terminating an employee is one of the most difficult administrative tasks a business owner faces. Beyond the emotional toll and the strict requirements of the Employment Standards Act (ESA), the financial accounting can quickly become a tangled web. When a company offers a generous severance package to a departing employee, the payroll department must immediately figure out how to classify those final payments for government reporting.
Whether your business operates in Toronto, London, or Ottawa, misclassifying termination pay can be a costly error. 📍 Many employers overpay the Workplace Safety and Insurance Board (WSIB) by accidentally declaring a massive lump-sum severance as regular wages. Conversely, under-reporting taxable termination wages can trigger a brutal WSIB audit. Understanding exactly what constitutes “insurable earnings” during a termination is vital for protecting your company’s bottom line as of May 2026.
Step-by-Step Process for Classifying Severance for WSIB in Ontario
Properly allocating a termination package requires precision. The WSIB looks at the nature of the payment, not just the title you put on the cheque. Here is the step-by-step process most Ontario employment law firms recommend for compliance.
Step 1: Identify Payments for “Working Notice”
If you give an employee four weeks of notice and require them to continue coming into the office and performing their duties, this is called “working notice.” Because the employee is actively working, their salary during this period is standard income. These wages are fully insurable, meaning you must report them to the WSIB and pay your standard premium rate on them.
Step 2: Assess “Pay in Lieu of Notice” (Termination Pay)
Often, employers prefer that the employee leaves immediately, offering them a lump sum or salary continuation instead of working notice. This is called “pay in lieu of notice.” 💰 According to WSIB policy, pay in lieu of notice is generally considered insurable earnings. Because it directly replaces the wages the worker would have earned had they worked the notice period, you must include it in your WSIB premium calculations.
Step 3: Carve Out Statutory Severance and Retiring Allowances
This is where employers save money. Under Ontario law, statutory severance pay (which applies to certain long-term employees at large companies) is strictly compensation for loss of employment, not wages for work done. Therefore, true statutory severance is not insurable. Furthermore, if you offer an enhanced “retiring allowance” or a common-law wrongful dismissal settlement to avoid court, these amounts are also generally exempt from WSIB premiums.
Step 4: Document the Allocation Carefully
If you hand an employee a $50,000 CAD cheque, you cannot just guess how much of it is insurable. You must document the exact breakdown in a formal Full and Final Release. 📄 You must explicitly separate the “pay in lieu of notice” (insurable) from the “common-law retiring allowance” (non-insurable). If you face a WSIB audit, the auditor will demand to see this legal settlement breakdown.
| Type of Termination Payment | Is it Subject to WSIB Premiums? |
|---|---|
| Regular Wages during Working Notice | Yes. Fully insurable earnings. |
| Pay in Lieu of Notice (ESA Termination Pay) | Yes. Replaces regular wages. |
| ESA Statutory Severance Pay | No. Exempt from WSIB premiums. |
| Common-Law Settlement (Retiring Allowance) | No. Exempt from WSIB premiums. |
| Accumulated Vacation Pay paid out | Yes. Fully insurable earnings. |
How Much Does it Cost in Ontario?
Mismanaging WSIB reporting during layoffs can result in significant financial leaks. 💵 Here is a look at the costs associated with getting this right in CAD:
- Cost of Overpaying: If you accidentally include a $40,000 severance package in your WSIB report at a premium rate of 2.5%, you needlessly lose $1,000 CAD.
- Employment Lawyer Fees: Having a law firm draft a clear Severance Agreement that properly allocates damages typically costs $750 to $2,500 CAD.
- Accounting/Payroll Review: Engaging a CPA to audit your final pay runs and correct your WSIB remittances usually costs $300 to $800 CAD.
How Long Does the Process Take?
Classifying termination pay should be done before the final cheque is cut. Drafting the severance offer and calculating the exact WSIB insurable allocation usually takes 2 to 5 days. If the WSIB decides to audit your payroll records because of a sudden spike or drop in insurable earnings, the audit process can take anywhere from 2 to 6 months to fully resolve.
Frequently Asked Questions (FAQ)
What happens if the employee sues for wrongful dismissal?
If an employee sues and you settle out of court, the settlement is typically classified as a retiring allowance (general damages for loss of employment). Because it is not a direct wage replacement for active work, these settlements are usually exempt from WSIB premiums.
Are bonuses paid upon termination subject to WSIB?
Yes. If the employee is owed a performance bonus or a commission that they earned prior to being terminated, that amount is considered part of their standard insurable earnings and must be reported to the WSIB.
Does the WSIB annual maximum still apply during a layoff?
Absolutely. In Ontario, WSIB premiums are only paid up to an annual maximum insurable earnings ceiling per employee. If the employee’s regular wages plus their “pay in lieu of notice” exceeds that annual ceiling, you stop paying premiums on the excess amount.
Can WSIB penalize me for over-reporting?
WSIB generally will not penalize you for overpaying them, but you are throwing away company money. If you realize you over-reported severance as insurable earnings, you can usually file an adjustment with the WSIB to claim a credit for the overpayment.
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