The biggest mistake that any recently dismissed employee can make is to automatically assume that their severance package is fair. Over 90 per cent of the initial severance offers that I review are, in one way or another, less favourable than what a court would award. Why?
There are two main reasons. The first is strategic. Companies assume that dismissed employees will accept what they are first offered – even if it is less that they should receive – rather than risk taking their chances with a dispute. The second reason is that many individuals are unaware of precisely what a proper severance package should contain.
It is true that most dismissed employees want to obtain their severance and move on. There is a fear that they could lose what they were first offered and end up with nothing at all. This fear is unfounded. A certain portion of each severance package is based upon a statutory requirement, which is unconditionally owed and cannot be taken away. Further, an employee who is dismissed without cause or notice is legally entitled to a severance package. That entitlement may change depending on how fast that employee can find another job, but their right to receive compensation arising from their dismissal is generally undisturbed.
How should a proper severance package be calculated and what should it include?
Employment agreements can play a role. If a contract sets out with sufficient clarity the severance terms that an employee is entitled to receive, and assuming it was brought to the employee’s attention before employment begins, then the defined severance terms may be all that the employee is entitled to receive. However, very few severance clauses are properly drafted, and several recent appeal-court cases throughout Canada have made it far more difficult for these clauses to hold up in court. Therefore, if an employer is asserting that a contract is limiting a right to severance, that should raise a red flag. Chances are there’s more to receive than what that contract requires.
An employee’s tenure is an important factor in assessing severance. The others are age, position, re-employment prospects and court precedents.
The ability to find a comparable role is the most important reference point. The main objective is to allow the dismissed employee sufficient time to find a comparable job. For this reason, older employees, especially those in their 50s and 60s, receive greater severance entitlements than their younger peers. If, for example, two employees perform the same role for the same period of time and are both dismissed, the older worker would have a claim to greater severance. Similarly, senior, high-level or unique and skilled workers have greater severance entitlements than workers where comparable jobs are more readily available.
Legal precedents also play a role. What have other employees within the same age range, tenure and position received in recent comparable cases that have gone to trial? Two employees with similar characteristics should obtain similar compensation. In my work, I always make reference to comparable cases because it is such a powerful indicator of what my clients should expect to receive.
In addition to the length of a severance package, there are other important considerations. Many companies unfortunately try to get away with providing employees with just their base salary during the severance period. However, a proper package should include all compensation and benefits that employees earned while employed. This includes commissions, regular bonuses, allowances, benefits, incentive programs or any other tangible and consistent payment beyond base salary. This is where many severance packages falter. I can almost always spot some form of an employee’s overall pay that is not being continued or that is discounted by an employer in some unreasonable way.
Employees should also pay close attention to the structure of a severance offer as this is another opportunity to negotiate improved terms. How a package is distributed can sometimes be more important than its length. Most packages include a term stating that if an individual finds a new job during the severance period then the amount of severance owed is reduced or offset to varying degrees. While these clauses are legal, they may not account for practical results. What if an employee is only able to find short-term, part-time or consulting work? What if she starts another job but it does not pay as much? For these reasons, negotiating how severance payments will be made and whether and to what extent they will reduced if an individual finds another job is an important component of any severance discussion.
How does COVID-19 affect a severance package? The pandemic is a relevant factor to consider. If re-employment is made more difficult to obtain due to COVID-19, then this ought to be taken into account. In a recent case against Hudson’s Bay, the judge commented that terminations that transpired during the pandemic would be given different consideration due to the negative effect on finding employment. Thus, certain employees can argue for a boost to their severance.
There is one final factor. Employees who display they have the courage to fight lowball offers are far more likely to come out ahead. Companies are aware of what amount of severance is reasonably required and are more likely to settle quickly and positively if employees retain a skilled lawyer who demonstrates their clients will not easily be deterred.
Daniel A. Lublin is founding partner of Whitten & Lublin, Employment & Labour Lawyers. Do you have a question about workplace law? You can email him here.
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