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The ins and outs of job severance

Date: Wednesday, April 4, 2012
Author: Daniel A. Lublin
Publication: Globe and Mail

Most employees cling to beliefs about workplace rights they gleaned from media, friends or reading the Internet. However, many of these “perceived” rights often do not exist. Here are some common misconceptions regarding severance and the law of dismissal:

Some employees believe that, upon dismissal, they are entitled to no more than their statutory right to severance, found in employment standards legislation. They are mistaken. There may be a few situations where only the employment standards payments are deemed sufficient, such as for minimum wage or transient employees, but the remaining 95 per cent of the Canadian workforce should not accept just the minimum. How do I know? Because I have successfully argued this point in court when my opponent was unable to produce one single case stating otherwise.

The reality is that, aside from pre-negotiated severance agreements (discussed below), when ordinary employees are fired without misconduct, they must receive a fair warning in advance of their termination, referred to as a reasonable notice period. However, seldom do employers want employees hanging around after being told of their terminations, so they elect to send them home instead and pay their salary and benefits over the reasonable notice period. This is what is commonly referred to as severance, and it is almost always more than the minimum amounts prescribed by legislation.

Severance is based on a rule of thumb, such as one month of severance for every year of employment. This is another useless myth. Severance is based on how long it should take an employee, acting reasonably, to secure a similar job. There is no correlation between this period of time and any rule of thumb formula. Rather, courts consider the employee’s age, position and tenure, and the availability of other comparable work, having regard to his or her training, qualifications and experience. And even then, this test has some boundaries.

When I argue these cases in court, judges tend to focus mostly on three objective factors: an employee’s age, her tenure and precedents (i.e., what other judges have decided when faced with similar facts). This is because the seniority of a position is often disputed and how long it should take someone to find another job is both arbitrary and subjective. In my case I referred to above, my client was fired after five years and provided with just the minimum five weeks’ pay under Ontario’s Employment Standards Act. However, he was awarded six months’ severance in court. No surprise there. The judge relied on the precedents and was probably sympathetic to my client because his former employer was being unreasonable by relying on just the minimums, which raises another good point. Judges are humans, and the “likability” of employees, employers – and even their lawyers – often affects their decisions.

Employees can contract out of fair severance. This is not a myth and employees unknowingly agree to do this all of the time. When first hired, many employees are required to sign employment contracts with clauses that specify the amount of severance they will receive. The problem is that, for most employees, these clauses limit them to either their minimum payments or something close to it. Why would anyone agree to this? Because they do not realize what they are agreeing to or they need the job so there is no other choice. Either way, if a contract provides for something less than what’s fair, a court will enforce it as long as it is properly drafted and agreed to.

 

What about employees who acquire another job before their severance period expires? They do not get to have it both ways. A court will deduct, dollar for dollar, any income earned through other employment during the severance period and credit that back to the terminating employer. This is why there are clauses in severance packages that require employees to notify their former employers when they find other work. Employees are usually uncomfortable with this requirement, but without it they would receive the windfall of both severance and another salary during the same period of time.

Poor performance is cause for dismissal. This is incorrect again. This would only be true where an employee has been proven incompetent, which has happened in court so infrequently that I tell my clients it’s close to impossible to prove. Similarly, the quantum of severance is not judged based on performance, meaning that both stars and incompetents should receive the same payouts if fired.

An employer needs a good reason to terminate. If this were true, no one would ever be fired. In reality, an employer does not need any reason at all, as long as a fair warning or severance payment is provided. Therefore, an employer has a green light to dismiss for any reason it sees fit, including my favourite reason: “We just don’t like you anymore.” The only reasons an employer cannot use are the prohibited grounds in human rights codes, which include personal characteristics such as age, race, colour, disability, religion and gender. Employers can discriminate on any other grounds – and they often do.

Consultants or contracts do not receive severance. This is now becoming a myth, although it was not always that way. Today, few contractors are truly contractors. Most are just masquerading as such. If there are elements of an employment relationship, such as permanency and dependency (and there usually are), then even contractors can sue for severance, although the quantum will be less than for genuine employees.

Unionized employees can never be fired. This is both true and false. Unionized employees can be dismissed but only for serious misconduct, such as theft or dishonesty, which is characterized as “just cause” under their collective agreements. Otherwise, they cannot be fired for more mundane offences, for being a “poor fit” or for restructuring.

 

If an employee is terminated, she will not receive Employment Insurance. On the contrary, only employees who are terminated for misconduct or those who resign may be ineligible and even then, that decision can be appealed. Employees who are fired for poor performance, laid off, restructured or downsized are all eligible for Employment Insurance.

Employees who retire should receive severance. They may wish it were so, but unless it is forced, a retirement is tantamount to a resignation, in which case there is no severance, no matter how long or meritorious the employee’s service.

An employee is entitled to a letter of reference. Another myth. Although the failure to provide a reference may, in some cases, contribute to the severance an employee should receive, there is no rule or law compelling an employer to provide a reference letter or even to confirm previous employment, again, no matter how commendable the employee’s service.

Last, but not least, many employees believe severance packages are not negotiable. This is both incorrect and foolish. Employers offer an amount of severance that they believe employees will accept, not the amount that they are actually entitled to. Why? Because they know that statistically most employees will simply accept what they are given, happy to get anything all. However, since most of these cases do not ever reach court, the fairness of a severance package is often in the eyes of the beholder – meaning they are negotiable so it makes sense to ask for more.

Sep 30, 2012