Payment in Lieu of Notice — Ontario Employment Law
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About Payment in Lieu of Notice
When an Ontario employer terminates an employee without cause, they must provide either working notice or a payment that compensates for that notice period. This compensation is known as 'payment in lieu of notice,' often abbreviated as PILON. Essentially, it is a lump sum or salary continuance intended to bridge the financial gap while the terminated employee searches for new work. The core principle of PILON under common law is to make the employee 'whole,' meaning they should receive all the compensation and benefits they would have earned had they been allowed to work through their full notice period.
This goes far beyond just base salary. A proper common law payment in lieu of notice should include the value of lost bonuses, commissions, stock options, car allowances, pension contributions (like in the Kisil v. IBM Canada Ltd. case), and the continuation of benefits like health and dental insurance, or cash compensation for their value. This is a critical distinction from the minimum entitlements under Ontario's Employment Standards Act, 2000 (ESA), which are covered on our 'termination pay' and 'severance pay' pages. Common law notice periods, and therefore the corresponding PILON, are almost always significantly greater than ESA minimums.
The length of the notice period itself is determined by various factors (known as the Bardal factors), which are explored in detail on our 'reasonable notice' page. This page, however, focuses specifically on the composition of the payment. Employers sometimes present offers that only cover base salary, which can be a form of wrongful dismissal if it doesn't account for the employee's total compensation package. Because calculating the full value of a PILON package can involve complex variables, understanding its components is the first step in assessing the fairness of a termination offer. Each employment situation has unique details, and a professional review can be essential to ensure you are receiving your full entitlement.
Frequently Asked Questions
What's the difference between payment in lieu of notice and severance pay in Ontario?
Payment in lieu of notice is a common law concept representing your full compensation (salary, bonus, benefits, etc.) for a reasonable notice period. 'Termination pay' and 'severance pay' are separate, specific minimum entitlements under Ontario's Employment Standards Act, 2000, which are often much less than the common law amount.
Does my payment in lieu of notice have to include my bonus and commissions?
Generally, yes. Under common law, the payment should include all forms of compensation you would have reasonably earned during the notice period, including bonuses and commissions. However, the specific wording of your employment contract or bonus plan can sometimes affect this entitlement.
Can my employer force me to take my payment in lieu of notice in installments?
Unless your employment contract specifies otherwise, a payment in lieu of notice is typically due as a lump sum upon termination. An employer paying it out over time (as salary continuance) may be permissible, but it must continue all benefits and perks as if you were still employed.
How are taxes calculated on a payment in lieu of notice?
Payment in lieu of notice is considered income and is subject to income tax. However, a portion of it may qualify as a 'retiring allowance,' which allows for a tax-deferred transfer directly into an RRSP, reducing the immediate tax burden.
Is there a time limit to challenge an insufficient payment in lieu of notice?
Yes. In Ontario, you generally have two years from the date your employment was terminated to file a lawsuit for wrongful dismissal, according to the Limitations Act, 2002. It is crucial to act within this timeframe.
When should I have a lawyer review my payment in lieu of notice offer?
You should seek a legal review before signing any release documents, especially if the offer only reflects your base salary, excludes variable compensation like bonuses, or seems low for your age, role, and years of service. An initial offer from an employer often represents their minimum obligation, not your full common law entitlement.
Common Scenarios
- A marketing manager with eight years of service is terminated and offered eight weeks' pay, but the payment calculation completely ignores her significant annual performance bonus.
- A senior sales executive is let go and receives a lump sum payment, but the employer fails to include the value of the lost car allowance and employer-matched pension contributions.
- An employee is terminated without cause and the employer offers to continue their salary for several months but informs them their health and dental benefits will cease immediately.
- A long-service employee is given a payment in lieu of notice that is based on an outdated salary from before a recent promotion and raise.
What You Should Know
- Before accepting any offer, create a list of every component of your compensation, including salary, bonuses, commissions, benefits, pension, and perks, to compare against the proposed payment.
- Never sign a Full and Final Release document in exchange for a payment in lieu of notice without fully understanding what you are giving up; it permanently waives your right to sue for more.
- Review your employment agreement for any termination clauses that might try to limit your payment in lieu of notice to only your base salary or the ESA minimums.
- If your employer's offer for payment in lieu of notice seems incomplete, consulting with an employment lawyer can provide a clear assessment of your full common law entitlements before you make any decisions.
Featured Cases
Koshman v. Controlex Corporation
2023 ONSC 7045 (CanLII) · 2023-12-13Wrongful Dismissal: Senior Executive Employee Awarded 24 Months' Notice and $50,000 in Damages
A senior executive employee was summarily dismissed after 18.5 years of service. The court determined the appropriate notice period and awarded damages, including 24 months' notice of termination, $50,000 in aggravated damages, and $192,112.19 in costs for the employer's improper conduct and lack of defense.
Sanghvi v. Norvic Shipping North America
2021 ONSC 1211 (CanLII) · 2021-02-17Wrongful Dismissal: Reimbursement for Business Expenses During Notice Period
A wrongful dismissal case involving a Senior Vice-President terminated without cause. The court determined that damages for wrongful dismissal should include reimbursement for business-related expenses during the notice period, but not personal expenses. The court also awarded pre-judgment interest and partial indemnity costs to the plaintiff.
Larry Patterson v IBM Canada Limited
2017 ONSC 1264 (CanLII) · 2017-02-23Wrongful Dismissal: 22-Year Employee Awarded 18 Months Notice and Pension Contributions
A wrongful dismissal case where a 67-year-old employee with 22 years of service at IBM Canada was terminated without cause. The court determined a 18-month notice period using Bardal factors and awarded pension contributions as damages, denying bonus and health benefits claims due to insufficient evidence. The discounted approach was applied to account for future mitigation.
Mr. De Jesus v Linamar Corporation
2016 ONSC 4383 (CanLII) · 2016-07-18Wrongful Dismissal: Production of Defective Parts Justified Termination
A wrongful dismissal case where the court determined that the production of defective parts by the plaintiff constituted misconduct sufficient to justify termination for cause. The court also awarded 15 months' notice and rejected punitive damages. The case considered the plaintiff's age, length of service, and the employer's financial risk.
Sweeting v Mok
2015 ONSC 4154 (CanLII) · 2015-06-26Wrongful Dismissal: 22-Year Employee Awarded 24 Months Notice
A wrongful dismissal case involving a 22-year employee who was terminated. The court assessed whether the termination was wrongful or constructive and determined the appropriate notice period and whether aggravated or punitive damages were warranted.
Peticca v Oracle Canada
2015 ONSC 2584 (CanLII) · 2015-04-20Wrongful Dismissal: Contingency Deduction Applied to Future Loss
A wrongful dismissal case where the plaintiff was awarded 17 months' salary in lieu of notice, with a 10% contingency deduction applied only to the future loss component based on the likelihood of re-employment.
Chopra v. Easy Plastic Containers Limited
2014 ONSC 4347 (CanLII) · 2014-07-21Wrongful Dismissal Case: Costs Awarded at $25,000
A wrongful dismissal case where the court determined the appropriate costs to be awarded to the plaintiff, fixing them at $25,000 inclusive of HST, and rejected the defendant's request for full indemnity costs.
O’Sullivan v. Cavalier Tool
2010 ONSC 3937 (CanLII) · 2010-07-09Constructive Dismissal: Demotion and 18 Months' Notice Awarded
A constructive dismissal case where the plaintiff was demoted and received 18 months' notice and $145,045.49 in damages. The court applied Young and Bardal factors and considered the plaintiff's refusal to return to a hostile work environment.
Doran v. Ontario Power Generation Inc.
2007 CanLII 49486 (ON SC) · 2007-11-16Constructive Dismissal: 24-Month Notice Awarded in Ontario Case
A constructive dismissal case where the plaintiff alleged that changes to compensation, job responsibilities, and reporting structure constituted constructive dismissal. The court applied the Farber test and found the cumulative effect of the changes to be a constructive dismissal. The plaintiff was awarded 24 months’ notice, with damages reduced by income earned during the notice period, resulting in a total award of $698,287.00.
Somir v. Kohler Canada Co.
2006 CanLII 42369 (ON SC) · 2006-12-20Wrongful Dismissal: 21-Year Employee Awarded 16-Month Notice
A wrongful dismissal case where a plaintiff with 21 years of service alleged termination without cause, while the defendant argued the plaintiff voluntarily resigned. The court awarded 16 months' notice, included overtime in pay in lieu of notice, and ruled that the plaintiff's efforts to mitigate damages were reasonable, including awarding tuition expenses for retraining.