Terminating an employee: final pay, the vacation payout and the ROE

Ending someone's employment is the moment payroll suddenly acquires a deadline. The decision itself is a management and legal question. What follows it — the last cheque, the vacation payout, the Record of Employment, the slips at year-end — is squarely a payroll question, and it is where small employers most often get caught out. Here is the sequence, written for a British Columbia employer.

The 48-hour rule (and the six-day rule)

Section 18 of B.C.'s Employment Standards Act sets two clocks. If the employer ends the employment, all wages owing must be paid within 48 hours of the termination. If the employee quits, the employer has six days after the last working day or the day the employee quit, whichever is later.

“Wages” here is broader than the last few days of salary. The Employment Standards Branch's own interpretation of section 18 lists accrued statutory holiday pay, overtime wages, unpaid vacation pay, anything sitting in a time bank, compensation for length of service, group termination pay, and money earned and due at the time of termination such as commissions. If your payroll cycle is semi-monthly and someone is let go on the 3rd, you cannot simply wait for the 15th.

Compensation for length of service

In B.C. an employer ending someone's job can give written working notice, pay compensation for length of service instead, or combine the two. The statutory minimum is tied to length of employment:

A week's pay for this calculation is the total wages earned over the last eight weeks divided by eight — including salary, commission, statutory holiday pay and paid vacation, but excluding overtime. Notice cannot run while an employee is on vacation, on leave, on temporary layoff or unavailable for medical reasons; in those cases the employer pays instead. No notice or compensation is required where the employee quits, retires, or is terminated for just cause, among a short list of other exceptions.

Two cautions. First, these are minimums. Common-law reasonable notice can be substantially larger, and whether just cause exists is a legal determination. Second, none of that is an accounting question. Confirm the entitlement with an employment lawyer, then bring the number to payroll.

Vacation pay always comes out

All remaining vacation pay must be paid on the final cheque. An employee with less than a year of service is still owed 4% of their wages. The only carve-out is for someone employed five calendar days or less. If you have been running an accrual, this is the moment it settles — see our guide to vacation pay rules for Canadian employers for how the liability builds up in the first place.

The Record of Employment

An ROE is required whenever an employee with insurable earnings has an interruption of earnings, whether or not they intend to claim Employment Insurance. The deadlines depend on how you file. Paper ROEs are due within 5 calendar days of the first day of the interruption of earnings, or the day the employer became aware of it. Electronic ROEs filed for weekly, biweekly or semi-monthly payrolls are due within 5 calendar days after the end of the pay period in which the interruption occurred. On a monthly or 13-period payroll, the deadline is the earlier of 5 days after the pay period ends or 15 days after the first day of the interruption. Our walkthrough of completing the Record of Employment covers the block-by-block detail.

How the payment is taxed

This part is federal, so it works the same everywhere in Canada. The label on the cheque matters less than what the payment is for:

• Wages in lieu of termination notice are employment income. Income tax is calculated using the bonus or irregular payment method; CPP contributions and EI premiums are withheld as they would be on regular salary; the amount is reported in box 14 of the T4, with EI insurable earnings in box 24 and pensionable earnings in box 26.
• A retiring allowance — damages for loss of employment, or a payment in recognition of long service, including unused sick-leave credits — is treated differently. No CPP and no EI are withheld. Income tax comes off at the lump-sum rates: 10% on $5,000 or less, 20% from $5,001 to $15,000 and 30% above $15,000, with lower federal rates for Quebec. It is reported on the T4 using code 66 for the eligible portion and code 67 for the non-eligible portion.

Where a single lump sum blends the two and the settlement does not break it down, the CRA generally treats the whole amount as a retiring allowance. Payment for accumulated vacation not taken, and salary continuance, are not retiring allowances — they stay ordinary employment income. Getting this split right determines your source deduction remittance for the period, so settle it before the cheque is cut, not after.

The year-end tail

A mid-year termination does not close the file. The final earnings and any retiring allowance codes flow onto the T4, the EI insurable earnings must reconcile to the ROE, and the employee's records are subject to the same retention rules as everyone else's. Fold the departure into your payroll year-end checklist rather than treating it as a one-off, and the February slip run stays uneventful.

The bottom line

Terminations fail on process, not on arithmetic. Confirm the entitlement with a lawyer, pay everything owing inside 48 hours, characterise the payment correctly before withholding anything, and file the ROE on Service Canada's clock. If you would rather hand the mechanics off, payroll services handled by a CPA keep the deadlines and the slips aligned.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique — please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an accountant in Abbotsford.