Founding partner , Whitten & Lublin, Employment & Labour Lawyers
Fifteen years ago, only around 25 per cent of employees in Canada had a written employment contract with defined severance terms. Now, that statistic is inverted. Why have employers moved toward drafting specific severance terms into employment agreements? Because in almost every case, these clauses serve to reduce the severance payouts made to former employees.
After a recent decision of the Ontario Court of Appeal, companies are claiming even more leeway over employment agreements that are being used to substantially decrease severance costs. But for employees who do not have the means or aptitude to challenge these contracts to begin with, there should be real cause for concern.
Without a written contract that addresses severance, employees are entitled to reasonable terms if terminated for any reason but misconduct. Each province in Canada has enacted legislation that sets a small minimum amount of severance required. However, these statutory payouts are almost always just the starting point of a dismissed employee’s rights.
Canadian courts require employers to consider circumstances, including a worker’s age, tenure, position, re-employment prospects and comparable precedents when crafting an appropriate severance package. For example, an employee with 20 years of tenure could be entitled to as little as eight weeks’ statutory termination pay, but as much as 18 months of total severance. Short-term but senior employees may have little to no statutory rights, but could receive up to six months of pay from a court, when considering both age and seniority.
Why would anyone ever agree to sign these expansive severance rights away? In my experience, the vast majority of employees either do not know any better or do not want to negotiate over severance when just starting a new job. In some cases, they have little bargaining power and no other reasonable choice. For unemployed individuals who are faced with the prospect of not having a job or signing whatever contractual language their prospective employer requires, however seemingly unfair, most will just quickly sign their names and deal with the repercussions later.
Judges have allowed the proliferation of severance limiting contracts, as long as they meet certain minimum thresholds, the most important of which is the requirement to at least provide an employee with whatever minimum legislative terms that are necessary. These “bare minimum” clauses, as they are often called, are legal – but only if properly drafted, a requirement that is not always clearly met.
This brings me back to the case I first mentioned above. When Noah Amberber’s company was acquired by IBM in 2015, he was offered continued employment with IBM, but subject to the terms of a written contract that predefined his severance rights. After Mr. Amberber’s termination, he sued IBM, claiming the severance clause he signed was unclear so he should receive a greater right than the contract intended. The Court of Appeal recently disagreed with Mr. Amberber, relying in part on a portion of the contract known as a “failsafe” clause stating that if his contractual severance rights did not at least comply with legislation, he would receive only what the legislation required.
This last point made by the Court of Appeal will be concerning to the majority of employees, many of whom already have trouble trying to understand what this all means. The problem, from their perspective, is that employers might as well make severance clauses as one-sided as possible, knowing that by including failsafe language they can never go wrong.
Unless the Supreme Court of Canada finally intervenes, it will remain difficult to determine whether a severance clause will hold up in court. If seasoned lawyers can’t even be sure, then how are employees or employers supposed to know?
What can workers do to protect themselves from this potential problem? First, review any new contract with a lawyer to understand what the language means.
Second, don’t be reluctant to negotiate these terms at the outset. If an employee can ask for more pay before starting a new job, then surely he or she can try to negotiate the terms of separation. Keep in mind that job offers are seldom withdrawn due to an attempt to improve the terms.
Third, negotiate severance at the time of termination. Most employers would rather offer a superior severance package than risk having a judge strike down the severance clauses for all their employees.
Finally, challenge the enforceability of these contracts where the facts present that argument. I have won in court by raising the inference that a contract was signed without proper consent, or that the language could possibly be illegal – such findings are not exceptions.
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