ENDING EMPLOYMENT AND RECORDS OF EMPLOYMENT

When an employee quits, is laid off, is dismissed, or stops working for a period because of illness or leave, the proprietor has obligations under federal payroll rules and provincial employment standards. This page covers the Record of Employment, notice and pay in lieu of notice, final pay, the tax treatment of different termination payments, and the records to keep. Employment standards examples use Ontario; the minimums in other provinces differ, so check the rules where the employee works.

THE RECORD OF EMPLOYMENT (ROE)

• When it is required: whenever an employee has an interruption of earnings, which generally means seven consecutive days without work and insurable earnings, or a drop in weekly earnings below 60% of normal because of illness, injury, pregnancy, parental leave or caring for a family member.

• Why it matters: Service Canada uses the ROE to decide whether the person qualifies for Employment Insurance benefits and how much they receive.

• Filing electronically: an electronic ROE, filed through ROE Web or payroll software, is due within five calendar days after the end of the pay period in which the interruption occurred.

• Filing on paper: a paper ROE must be given to the employee within five calendar days after the interruption or after the employer becomes aware of it.

• Contents: the first and last day worked, insurable hours and earnings for the required number of pay periods, any vacation pay or other amounts paid on separation, and a reason code.

COMMON ROE REASON CODES

• Code A: shortage of work, end of contract or end of season.

• Code D: illness or injury.

• Code E: quit.

• Code F: maternity leave.

• Code M: dismissal.

• Accuracy matters: the code should reflect what actually happened. Service Canada can investigate and penalize false or misleading ROEs.

NOTICE OF TERMINATION (ONTARIO EXAMPLE)

• Statutory minimums: under Ontario's Employment Standards Act, an employer ending employment without cause must give written notice, or pay in lieu, of at least one week for service under one year, two weeks for one to three years, three weeks for three to four years, and one more week for each further year, up to eight weeks for eight or more years.

• Probation: no statutory notice is required in the first three months of employment.

• Benefits during notice: any benefit plans must be continued through the statutory notice period.

• Severance pay: a separate Ontario entitlement applies only to employees with five or more years of service where the employer's payroll is at least $2.5 million, so it rarely applies to a small proprietorship.

• Common law notice: unless a valid written contract limits notice to the statutory minimum, a dismissed employee can claim reasonable notice at common law, which is often much longer.

• Wilful misconduct: notice is not required where the employee was guilty of wilful misconduct, disobedience or wilful neglect of duty, but this is a high standard and should be documented carefully.

FINAL PAY

• Timing in Ontario: all wages owed must be paid by the later of seven days after employment ends or the next regular pay day.

• What is included: regular wages to the last day worked, overtime, public holiday pay, any pay in lieu of notice, and all vacation pay earned but not yet paid.

• Deductions: income tax, CPP and EI are deducted as on a regular pay. Amounts owed by the employee to the business can be deducted only with written authorization.

• Return of property: keys, equipment and access credentials should be collected, and system access removed, on the last day.

TAX TREATMENT OF TERMINATION PAYMENTS

• Final wages, vacation pay and pay in lieu of notice: employment income, subject to income tax, CPP and EI, reported in box 14 of the T4.

• Retiring allowances: amounts paid for loss of employment beyond what the employee earned, such as severance or damages for wrongful dismissal, are retiring allowances. They are not subject to CPP or EI and are reported on the T4 with other information codes 66 and 67.

• Withholding on lump sums: income tax on a retiring allowance paid as a lump sum is withheld at 10% on amounts up to $5,000, 20% from $5,000.01 to $15,000, and 30% over $15,000 (different rates apply in Quebec).

• Transfer to an RRSP: a retiring allowance can be paid directly into the employee's RRSP without withholding, up to the employee's available contribution room.

WORKED EXAMPLE

An Ontario employee earning $1,000 a week, with two and a half years of service and $800 of unpaid vacation pay, is permanently let go on June 12 because there is not enough work.

• Notice: two weeks under the Employment Standards Act. Without working notice, $2,000 is paid in lieu, subject to income tax, CPP and EI.

• Vacation pay: the $800 owed is included in the final pay.

• Timing: final pay by the later of June 19 or the next regular pay day.

• ROE: reason code A, filed electronically within five days after the end of the pay period that includes June 12, showing the pay in lieu of notice and vacation pay.

RECORDS TO KEEP

• Termination file: the notice letter or resignation, the final pay calculation, the ROE and any release signed by the employee.

• Employment standards records: in Ontario, records of hours, wages and vacation must generally be kept for three years after the work was done or the employee left.

• Payroll records: kept for the CRA's six-year retention period.

KEY POINTS

• ROE within five days: for every interruption of earnings, with the correct reason code.

• Notice or pay in lieu: at least the provincial minimum, and possibly more at common law.

• Pay everything owed: including vacation pay, on time.

• Know the tax treatment: pay in lieu is employment income; severance and damages are retiring allowances.

SOURCES

• Service Canada: How to complete the Record of Employment form.

• Ontario Employment Standards Act, 2000: Parts XV (termination and severance) and section 11 (payment of wages).

• Canada Revenue Agency: Retiring allowances, and Guide T4001, Employers' Guide, Payroll Deductions and Remittances.