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Sometimes called the “layoff payoff,” severance payouts from employers are often accompanied by emotions and mental stressors – and they might become more commonplace.
The past year has strained many people’s finances already and layoffs are expected to increase throughout 2023 with the jobless rate predicted to push 7 per cent, according to RBC Economics. Therefore, clients will need to know what makes up a good severance package, when to say no to an offer and counter, and how to adjust a financial plan in the meantime.
“We’re seeing lots of questions come from clients about this,” says Julie Petrera, senior strategist, client needs at Edward Jones in Toronto. “So, we’re doing a lot of work to make sure advisors are ready to have these conversations and to understand fully what clients are going through.”
There are several scenarios in which a person might be offered a severance. First is expected severance, meaning the person knows it’s coming and can use their advisor to help plan for what to do with the money.
“Then, there’s also the case where it’s unforeseen, and so they just come to their advisor and they’re like, ‘So, this happened,’” Ms. Petrera says, adding advisors need to ask about severance package offers right away.
“Yes, there could be a lump sum, but sometimes they have the choice to not take a lump sum and to take salary continuance.”
When she’s talking to advisors at her firm about how to deal with clients in this situation, she tells them repeatedly not to let their own biases or what they would do if they were in this situation get in the way. It’s about the client and what they want.
“Some people will say, ‘I want to take this [money] in the way where there’s the least amount of taxes’, and some people will say, ‘I want to take this [money] immediately, all of it, right now, because I don’t trust the viability of this company,’” she explains.
Then, there are items like benefits, insurance and other protections to consider.
“A lot of people have life and disability insurance through work, so when they lose your job, they’re losing all of the compensation and protection that came with it,” Ms. Petrera says. “Clients need to know what to do next in this case.”
But it’s also important for advisors to remember that some clients may see this event as an opportunity to start something new, she notes.
“A client may say, ‘I actually want to start my own business now,’ and another client may say, ‘I have a new job lined up.’ So, how we approach the risk would be very different,” she explains.
“While we help navigate the financial aspect of it, we need to know how this changes their financial goals or even their non-financial goals.”
Leaving ‘money on the table’
The one thing that still surprises Stuart Rudner, employment lawyer and managing partner at Rudner Law in Markham, Ont., is the number of people he sees after they’ve already taken the severance thinking they “got a great deal, but in reality, they’ve left a lot of money on the table.”
He says clients tell him they didn’t want to come at first because they worried about the legal fees when they might be in a tighter financial situation.
“But I tell my clients, ‘Like my grandmother used to say, it’s being penny wise and pound foolish,’” Mr. Rudner says. “You may save yourself $500, but you might lose tens of thousands of dollars.”
For him, the big task when meeting clients is to dispel many of the myths about severance pay, including the idea that the deadline to accept an offer, often imposed by the employer, is legally binding when it’s not.
“It’s really important people understand that’s not the way the law works. You don’t lose all your legal entitlements if you miss that arbitrary deadline your employer imposed on you,” Mr. Rudner says.
“I understand why employers do it. They want to keep things moving. They don’t want this thing lingering, but there is no legal force behind those deadlines.”
If a client doesn’t sign, their legal entitlement is still theirs, he adds.
Then, there’s the myth about the amount of pay a client is entitled to in a severance package.
Mr. Rudner says there’s often provincial legislation in place – such as the Employment Standards Act in British Columbia or the Saskatchewan Employment Act – that sets out a certain amount of severance an employer must provide based on years of service, “but there are no hard and fast rules.”
Compensation in these cases is so specific to the individual with factors that include salary, length of service, employability, benefits, commission, bonus, car allowance, pension and stock options.
Not set in stone
Bonuses are an important consideration when looking at a severance package as many may not include this as part of a client’s compensation if they haven’t finished out the whole year with the employer or bonuses haven’t been calculated at the time of the severance offer. But it’s often an aspect worth fighting for, explains Simon Kent, founder and lawyer at Kent Employment Law in Vancouver.
“From the employee’s perspective it’s, ‘I didn’t leave. I didn’t resign. I didn’t do anything wrong. It’s your decision to let me go. Why would I not at least get [part] of the bonus?’” Mr. Kent says.
“Now, sometimes, it’s in a written contract that talks about this issue, but most times, it isn’t.”
Even if it’s written as a policy, it’s definitely not set in stone, he adds.
“The employer will just think, ‘He didn’t cross the finish line here on Dec. 31. We’re not going to pay him this bonus,’” Mr. Kent says. “Then, of course, that becomes something that needs to be negotiated.”
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