How Severance Pay Affects Long-Term Disability Benefits in Ontario

Losing your job is hard. But losing it while dealing with a long-term disability? That adds a whole new layer of stress. If you’re in Ontario and receiving (or applying for) long-term disability benefits, a common question is: “What happens to my LTD payments if I receive severance pay?” The relationship between severance pay and long-term disability can be confusing, especially when both come into play at once.

Severance is meant to support you after job loss, while LTD supports you when a medical condition prevents you from working. At first glance, they seem unrelated. But in reality, the two often interact in unexpected ways that can impact how much you receive — or even whether you remain eligible for one or the other. Understanding these interactions is essential if you want to protect your income and avoid giving up benefits you may be entitled to. Let’s explore how to protect your benefits and avoid common mistakes.

First, A Quick Look at Severance Pay in Ontario

When your job ends in Ontario, and it’s not because of something you did wrong, your employer usually has to give you either a heads-up before your last day or, more commonly, pay you instead. We call that severance. This money can come from two main places:

1. The Employment Standards Act, 2000 (ESA): This is Ontario’s basic rulebook, and you can find the full text of the legislation here. It sets out the minimum amount of termination pay and, for some longer-serving employees at bigger companies, actual severance pay. If you’ve worked for five years or more, and your employer is a certain size, you might get ESA severance, which is generally a week’s pay for every year you worked, up to a maximum of 26 weeks.
2. Common Law: This is where things can get much bigger. Beyond the ESA’s minimums, judges have developed rules that often mean you’re owed more severance. It depends on things like how old you are, how long you worked there, what kind of job you had, and how easy it’ll be to find a new one. Common law severance can often add up to months, sometimes even over a year or two of pay. Employers sometimes try to limit this in your original job contract, but those limits don’t always hold up in court.

What Exactly are Long-Term Disability (LTD) Benefits?

Long-term disability benefits step in when you can’t work because you’re dealing with a long-lasting illness or injury. For most people in Ontario, this coverage comes through a group insurance plan your employer set up. These plans spell out everything: what counts as “disabled” (like, can you do your own job, or any job?), how much of your pay they’ll cover (usually 60-70%), and how long the payments might last. Your specific plan details are super important here, especially when you’re thinking about other money coming in, like long-term disability benefits themselves.

Here’s the kicker: almost every LTD policy has what are called “offset” or “deductible income” rules. These rules basically say that if you get money from other specific places, your monthly LTD payment will be reduced by that amount. The insurance company’s idea is that they’re the last ones to pay, and they don’t want you making more money while on disability than you did while working. Things like Canada Pension Plan Disability (CPPD) benefits, WSIB payments, and yes, severance pay, are often on that list of offsets. This kind of detail often becomes a big deal if you’re facing an LTD claim denial, especially for conditions like anxiety or depression. For more specific insights into these types of claims, our blog post: ‘Mental Health & Long-Term Disability: Can You Get Approved for Anxiety or Depression?‘ can provide further guidance.

The Big Question: How Severance Directly Hits Your LTD

The main way severance affects your LTD money is through those “offset” rules. Most LTD policies clearly state that severance payments count as “other income” that needs to be subtracted from your monthly LTD cheque. So, if you get a lump sum of severance, your LTD payments might stop or get cut back until that severance money has, on paper, been “used up” over a certain number of months.

Imagine you get $20,000 in severance and your LTD benefit is $2,000 a month. The insurer might just stop your LTD payments for 10 months ($20,000 divided by $2,000). Now, the exact way this plays out is really going to depend on the precise wording of your specific LTD policy. Some policies are crystal clear about how severance works as an offset; others are a bit vague, which can lead to arguments. This kind of detail often becomes a big deal if you’re facing an LTD claim denial, highlighting why knowing your policy inside out is so important to your long term disability lawyer.

Common Situations and Things to Think About:

1. Already Approved for LTD When Fired: If you were already getting LTD payments before your job ended, those payments should generally continue. The insurance company already agreed you were disabled. But that severance money you get might still reduce your LTD payments under the offset rules.
2. LTD Claim Was Pending or Filed After Being Let Go: This is where it gets much trickier. If you applied for LTD but the claim wasn’t approved by the time you were terminated, or if your health issues flared up after your last day, the insurance company might argue your coverage stopped when your employment did. In these cases, the exact date your disability started versus your official termination date, plus what your severance agreement says, are hugely important. If you’re going through this, our blog post: ‘Lost Your Job While on Disability in Ontario? Here’s What Happens Next.‘ has more insights.
3. Lump Sum vs. Payments Over Time (Salary Continuance): How you get your severance matters. A big lump sum might mean your LTD payments are completely paused for a long stretch. If your severance is paid out over several months (like regular paycheques), the insurer might just reduce your LTD month-by-month as you get those payments.
4. Signing a “Release” with Severance: Almost all severance agreements that offer pay above your guaranteed minimum payments come with a “release” – basically, you agree not to sue your employer for certain things. It is absolutely, critically important to make sure this release doesn’t accidentally make you give up your rights to your long-term disability benefits. Signing a too-broad release without understanding it could mean you unknowingly wave goodbye to your LTD money.

Watch Out for These Problems

Your old employer and the insurance company aren’t always going to spell out exactly how your severance affects your LTD. In fact, some employers go out of their way to keep you in the dark. You might feel rushed to sign a severance package, or an insurer might try to deny or delay your LTD, claiming your severance is the reason. Common arguments often come up when:

• The insurance company claims the severance period means you’re no longer an “active” employee, trying to stop your LTD, even if your disability began while you were working.
• The insurer messes up the calculation of the offset, or they try to get back money they say they “overpaid.”
• The severance agreement’s release terms are interpreted in a way that hurts your LTD rights. If you face any of these issues, understanding the process for long-term disability appeals can be a real lifeline.

Why Talking to a Lawyer is So Important

Given how tangled severance and LTD can get, getting legal advice is almost always the smartest move. Talk to a lawyer who knows both employment law and long-term disability claims before you sign any severance agreement, or if you run into problems with your LTD after your job ends.

A skilled lawyer can:

• Go through your LTD policy: They’ll help you understand all those tricky offset rules and clauses about coverage ending.
• Check your severance package: They’ll see if it’s fair under common law and if anything in it could hurt your LTD.
• Negotiate for you: They might be able to help structure your severance payments differently to reduce the impact on your LTD, or make sure your LTD benefits are clearly protected in the severance agreement. Good employment negotiation can make a big difference here.
• Fight denials: If the insurer tries to deny or cut your LTD because of severance, a lawyer can help you appeal that decision or take legal action.

The way severance pay and long-term disability benefits connect can be a real headache if you’re not prepared. Don’t risk your financial stability by trying to figure it all out on your own. Knowing your rights and having an expert on your side can truly change the outcome, helping you protect your vital benefits and secure your future. For employees proactively thinking about how to protect their careers amidst health challenges, our blog on ‘Planning for Job Security in 2025: Tips for Employees with Disabilities‘ offers additional valuable advice.

Here at Unified LLP, our team specializes in helping people across Ontario and Alberta with both employment law issues, like wrongful dismissal and severance, and long-term disability claims. We understand precisely how these areas overlap and we’re dedicated to protecting your rights. If you’ve been offered severance while dealing with a disability, or if your LTD benefits have been affected by losing your job, please don’t hesitate to reach out for a confidential chat. A compassionate and skilled employment lawyer in Toronto or long term disability lawyer from our firm can give you the clear answers and strong support you need right now. We’re happy to offer a free initial consultation about your employment rights to help you understand where you stand without any upfront cost. Your financial security and peace of mind are just too important to leave to chance.