What is pay in lieu?

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In all jurisdictions across Canada, employers must adhere to legislation under their respective provincial or territorial Employment Standards Act (ESA), where they’re required to provide an employee with a notice of termination, termination pay, or a combination of both. The termination pay is often referred to as “pay in lieu”, where the employee receives compensation from the organization instead of working through a notice period.

While the explanation of what pay in lieu means is straightforward, the actual legislation and administration is more complex. Here are the points for Canadian employers and payroll practitioners need to know when it comes to pay in lieu:

Timing matters

In most jurisdictions, pay in lieu must be provided to the employee within a particular timeframe - a lump sum after seven days of termination or by the next pay date, whichever is the later.

Wage calculations don’t differ

When an employee receives pay in lieu, it should equal what their regular wages would have been for the duration of their termination notice period.

This is a big one - pay in lieu is considered employee income

Pay in lieu is subject to Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax deductions. A best practice for payroll professionals is to use the “bonus method” in order to determine what should be deducted from the remuneration.

Employee qualifications

Employers are not required by legislation to provide a terminated employee with notice or pay in lieu if they’ve been employed with the organization for less than three months.

Determining what the notice period is

When calculating an employee’s pay in lieu, the provincial or territorial termination notice legislation will dictate the compensation. Pay in lieu should equal what the employee’s regular wages would have been for termination notice period – and the legislation regarding that timeframe is different depending on the jurisdiction. For a comprehensive overview of the required termination periods by province and territory, click here.

Payworks' Payroll Guide.

 
For more comprehensive information on Canadian payroll legislation, download the Payworks Payroll Guide: info.payworks.ca/en-ca/payroll-guide-for-canadian-business.
 

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