Daniel Lublin is the founding partner of Whitten & Lublin, Employment & Labour lawyers
These are the two workplace law questions I am asked most often:
“How much severance should I receive?"
“Why should my severance pay be cut off when I find another job?”
What makes a severance package fair? Start with whether an employee signed a contract that defines the severance amount, which has become more common. If there is a valid clause (and validity itself can often be challenged), courts almost always provide the employee with just what the contract requires, no matter how long or meritorious his or her service.
If a contractual clause does not apply, then the employee is entitled to a fair and reasonable severance package. There are five main factors to consider.
Age: The older the employee, the greater the severance. Older age usually renders re-employment prospects far less likely. An employee who is 60 years old will receive far more severance than an employee in his or her mid-30s, even if the nature of the work they perform is the same.
Tenure: Just as older age will engender a greater severance package, longer tenure will do so, too. An employee who has worked for the same company for his or her entire career will have a far more difficult time securing comparable re-employment elsewhere.
Position: Although this is a factor of declining importance, it is still a relevant consideration. Employees in senior roles receive better severance payments than colleagues in junior positions, even if their age and tenure are comparable. Executives often receive the highest severance awards. Conversely, administrative employees often receive the lowest.
Availability of comparable employment: The harder it is for a dismissed employee to find other comparable work, the longer the severance should be. Employees who work in a specialized field, where there are fewer available opportunities to re-employ, receive better severance compared with individuals who should quickly find other comparable work.
Precedent: This is the most important consideration. 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 expect to receive similar results.
To provide some context, here are some of the severance awards in cases I was involved in:
- a 61-year-old executive with two-years’ tenure – was awarded eight-months severance;
- a 34-year-old senior IT role with one-year’s tenure – was awarded four-months severance.
- a 47-year-old administrator with 22-years’ tenure – was awarded 16-months severance;
- a 30-year-old marketing manager with five-years’ service – was awarded six-months severance.
Why should severance payments stop once the employee finds another job?
The goal of severance is to protect an employee’s income until such time as he or she finds another job. Therefore, a severance package is not supposed to provide any kind of windfall. For example, if a court awards an employee 12 months severance, the judge is first required to deduct, dollar for dollar, any other income the employee received during those 12 months from what was otherwise owed. In addition, if an employee fails to reasonably look for other work of a comparable nature, the judge can also reduce the amount of severance that would have otherwise been awarded.
For these reasons, most severance packages in one way or another address the possibility of an employee finding other work by requiring him or her to report it to their former employer, resulting in some form of offset from what they were owed.
The most common scenario used by employers is to reduce the employee’s remaining severance by half the amount once he or she finds another job. If an employee with a 12-month severance package finds a similar paying job in six months, then the employer pays out half the remaining amount, or three months, such that the total severance payment is nine months.
Not only are these clauses legal, employees are generally better off agreeing to them when compared with what a court would do. In this same example, a court would deduct all of the income earned by the employee from the other job such that he or she would only receive six months pay. Agreeing to the employer’s severance package, even with the 50-per-cent cut-off upon finding other work, provides a financial benefit.
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