12 Feb Severance Packages
How much money should I get in a severance package
The answer to what an employee is entitled to in a severance package is specific to that employee and not simply a question of what an average severance package or normal severance package might be. There are a number of factors that lead us to the answer.
Is there a written employment contract?
If the employee has a written employment contract, it might define what the employee is entitled to upon termination. This is the starting point.
A clause defining the rights of an employee upon termination might provide entitlements that are very favourable to the employee but could also provide entitlements that are not all that favourable to the employee.
In some cases, employee entitlements upon termination of employment can be very favourable and might include anything from substantial lump sum payments to stock options. Although typically (but not always) found at the executive level, termination entitlement terms that are very favourable to the employee are a result of an employee having a certain amount of leverage when they entered into the agreement. Employees with these kinds of entitlements likely spent considerable time negotiating and defining these terms, including getting legal advice, and will know what they are entitled to. If drafted properly, there is normally very little to debate in a situation like this and the severance package provided to the employee is simply as defined in the employment contract.
On the contrary, other employees may have entitlements upon termination that are not very favourable. The lower end of this is range is when an employee has agreed to accept their minimum statutory entitlements as set out in the Employment Standards Act. While written employment contracts can’t limit employees to less than the employee’s minimum statutory entitlements as set out in the Employment Standards Act, a written employment contract can certainly hold an employee to those minimum rights and nothing more.
What can I do if I signed a contract accepting my minimum statutory entitlements upon termination
Employees who have held a position for many years are often surprised that their severance package quotes a contract that they signed many years ago agreeing to their minimum statutory entitlements pursuant to the Employment Standards Act.
Unfortunately for employees who discover a clause limiting them to their rights under the Employment Standards Act upon termination, there may not be much that can be done. In some cases, there may be arguments to get the employee out of the contract, or at least the part defining their termination entitlements, but this is a fact specific analysis and is often uphill to say the least.
Sometimes, an employment contract sets out termination entitlements somewhere in between these two examples. For instance, it might provide the employee with four weeks of pay for each year of service.
No written employment contract/no written employment contract defining termination entitlements
If an employee does not have a written employment contract, or has a written employment contract but the contract does not define termination entitlements, they are not required to accept their minimum statutory entitlements under the Employment Standards Act.
In this scenario, the employees rights would be defined under the common-law. This is typically a greater set of entitlements than the employment standards act provides.
Working Notice or Pay in lieu of notice
The common-law requires that an employee be provided with reasonable notice of their termination, or pay in lieu of this reasonable notice, or some combination of these two.
Pay in lieu of notice is the concept that many clients think of when they are think of a severance package ie how much will they get paid. However, the obligation is for the employer to provide the employee with notice of the termination so that they can seek out and obtain new similar employment. It is perfectly acceptable for the employer to provide what is called working notice to the employee. In this situation, the employer would simply give the employee notice that their employment will be terminated on a certain date in the future that is far enough away to constitute a reasonable notice period.
In a situation where pay in lieu of notice is being used, the employer is choosing to pay the employee for that period of time rather than have them continue to work during that period of time.
How much notice or pay in lieu of notice is an employee entitled to
I often meet with employers and employee who tell me they already know that everyone gets a month per year of service as a notice period and they just want me to write up the proposed agreement or look over the proposed agreement.
While it may happen that some employees are entitle to a month per year of service when defining their notice period, this is absolutely not the case for everyone.
Some employees may be entitled to less than a month per year of service while some employees may be entitled to more than a month per year of service. The length of an appropriate notice period for an employee is an analysis of their specific situation having regard to a number of factors such as years of service, age of the employee, the position that they held including whether it may have been specialized or management, and several other factors. Determining the appropriate notice period for a specific employee is something that requires specific legal advice.
The dollar value of a notice period is intended to be the value of the compensation that the employee would have received during that amount of time if they were working.
Other than the dollar amount, what other things matter in a severance package
In accepting a severance package, an employee will normally be required to sign a release waiving all rights to pursue matters related to their employment in exchange for what they are getting out of the deal. However, a release can include various terms. This should be thought of as what the employer is getting in exchange for the money that they are paying. An employee should obtain legal advice before signing a release.
Careful attention should also be paid to an employee’s obligations to search out and accept new similar employment or “mitigate their loss” including any obligations to report to the employer on these efforts and how their compensation may or may not be modified by obtaining new work.
If a reference letter is important to the employee, what this letter will say should also be addressed. Many employees are surprised to learn that employers are not obligated to provide the glowing reference letters that employees tend to assume they will be provided with. If a reference letter is important to an employee, it should be incorporated into the terms of the agreement.
Severance packages can be complicated. Providing too little can trigger litigation. Providing too much can mean an employer is over-paying.
If you are an employer planning to provide a severance package to an employee or an employee who has been presented with a severance package, we can help to make sure that the agreement is thorough, fair and reasonable.
Whether you are an employer or an employee, obtaining good legal advice at an early stage can help to avoid turning a small problem into a big one.
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