Should I Sign a Severance Agreement? What to Check First
Signing a severance agreement usually means accepting the employer's offer in exchange for a full and final release of all claims, including wrongful dismissal, and often human rights and other claims. Once signed, a release is very hard to undo. So the key question is whether the offer is close to what the employee is legally owed. Employment standards minimums must be paid whether or not a release is signed, so the release should only be exchanged for something more than the minimums.
This article is part of the guide to employment law in Canada.
The short version
- Don't sign on the spot. Ask for time to get advice.
- Statutory minimums are owed regardless of whether a release is signed.
- Compare the offer to likely common-law reasonable notice, unless a valid contract clause limits it.
- Check benefits, bonuses, commissions, pension, stock options and vacation pay.
- Short signing deadlines are often negotiable.
- Initial offers are often negotiable, especially when they only cover the minimums.
What Is in a Typical Severance Agreement
| Term | What to look for |
|---|---|
| Payment amount | Is it only the statutory minimum, or more? Lump sum or salary continuance? |
| Benefits | How long health, dental, life and disability coverage continues |
| Bonus and commission | Whether amounts earned or that would have been earned during the notice period are included |
| Pension or RRSP matching | Whether contributions continue during the notice period |
| Stock options and equity | What happens to unvested awards under the plan terms |
| Release | Which claims are given up. Usually all claims, including human rights claims |
| Confidentiality | Whether the agreement and its terms must be kept confidential |
| Non-disparagement | Whether this applies to both sides |
| Reference letter | Whether the employer will provide one, and what it will say |
| Restrictive covenants | Whether existing non-compete or non-solicitation clauses are confirmed |
| Deadline to sign | How long the employee has to decide |
| Legal fee contribution | Whether the employer will pay something toward independent legal advice |
Step 1: Separate the Minimums From the Offer
Employment standards laws require minimum notice or termination pay, and in Ontario and federally regulated workplaces, statutory severance pay for eligible employees. These amounts must be paid regardless of whether the employee signs a release. In practice, an employer should not make statutory entitlements conditional on signing.
Anything above the minimums is what the employee is being offered in exchange for the release. See severance pay in Canada.
Step 2: Check the Employment Contract
If the contract contains a clear, legally compliant termination clause limiting the employee to the statutory minimums, the employer may only owe those minimums. If the clause is unenforceable, the employee may be entitled to common-law reasonable notice, which is often much more.
Ontario's courts have struck down many termination clauses. Since Waksdale v. Swegon North America (2020), an illegal "for cause" provision can void the entire termination scheme. In August 2026, in Baker v. Van Dolder's Home Team Inc. and Li v. Wayfair Canada ULC, the Court of Appeal held that "at any time" and "for any reason" wording does not, on its own, invalidate a clause, and that contracts must be read as a whole.
Step 3: Estimate Reasonable Notice
If no valid limit applies, courts consider the type of job, length of service, age and availability of similar work. A lawyer can usually give a realistic range quickly. Comparing that range to the offer shows how much room there is to negotiate.
Step 4: Check the Details
- Vacation pay: accrued, unused vacation pay must be paid out.
- Benefits: in many provinces, benefits must continue at least for the statutory notice period.
- Bonuses: in Matthews v. Ocean Nutrition Canada (2020), the Supreme Court held that bonus plans must clearly and unambiguously remove an employee's right to bonuses that would have been earned during the notice period.
- Disability coverage: losing long-term disability coverage can be a serious risk. Ask whether coverage can be converted or compensated.
- Taxes: severance is generally taxed as a retiring allowance. Some of it can be transferred to an RRSP without immediate tax, but only for years of service before 1996.
Step 5: Negotiate
Common ways to improve a package include:
- a larger lump sum or longer salary continuance
- longer benefits continuation
- pro-rated bonus or commission
- a contribution to legal fees
- a positive reference letter or agreed message to colleagues and clients
- outplacement or career transition services
- a mutual non-disparagement clause
- release of restrictive covenants
Negotiation is usually done in writing, often through a lawyer, on a without-prejudice basis.
Human Rights and Releases
A release usually covers human rights claims too. If the termination may be linked to disability, pregnancy, age, family status or another protected ground, get advice before signing. Human rights tribunals have the power to examine whether a release was signed fairly, but a signed release can still be a serious obstacle. See human rights complaints at work.
EI and Severance
Severance normally delays EI benefits. Temporary federal measures introduced in 2025 allowed eligible claimants to receive EI without first using up separation payments, and in August 2026 the federal government announced a one-year extension. Apply for EI right away regardless of the package. See EI after being fired or laid off.
Red Flags in a Severance Offer
- the offer only matches the statutory minimum but requires a release
- a very short deadline, such as 24 or 48 hours
- statutory amounts are made conditional on signing
- benefits stop immediately with no compensation
- the release includes broad new restrictive covenants
- the employer refuses to put the offer in writing
Frequently Asked Questions
Should I sign a severance agreement right away?
No. Ask for time to review it and get advice. A few days to a week is a common, reasonable request.
Can I negotiate a severance package?
Yes. Many first offers leave room for improvement, especially when the termination clause may be unenforceable.
What happens if I don't sign?
The employer must still pay the statutory minimums. The extra amount offered for the release may be withdrawn, and the employee may need to negotiate or sue to recover common-law notice.
Can I undo a severance agreement after signing?
Rarely. Courts may set aside a release only in limited circumstances, such as duress, misrepresentation, or unconscionability. Treat a signed release as final.
How much does a severance review cost?
Many employment lawyers offer flat-fee reviews. See how much an employment lawyer costs in Canada.
Received a severance offer? Search LawyerDirectoryCanada.ca for employment lawyers by province and city.
Sources
- Your guide to the Employment Standards Act: termination of employment, Government of Ontario
- Your guide to the Employment Standards Act: severance pay, Government of Ontario
- Ontario Court of Appeal rules on ESA termination clauses: the Baker and Li decisions, BLG
- Employment lawyer fees in Ontario: what you'll actually pay, UL Lawyers
- Support for Canadian workers and businesses affected by U.S. tariffs, Department of Finance Canada
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