Severance Packages: Five Things Every Employer Should Know

Imagine yourself as a senior manager of a small business. Sales have decreased to a point where you have to make some staff cuts. One will be Marsha, an administrative assistant with over 25 years service, and the other is Kent, an expensive employee you hired just last year. How much will these terminations cost? While Kent signed an employment contract, you don’t recall Marsha signing anything. As a long-term employee, how much pay is she entitled too? Questions start to circulate your mind…. what should be included in a severance package?

Without professional help, employee terminations can feel like navigating a difficult maze. To better understand the termination process , here are five questions an employer should consider when putting together a severance package.

1. Is the employee owed any money under the Employment Standards Act?

This includes unpaid wages, overtime pay, statutory holiday pay, termination pay & severance pay.

Some salaried employees are not paid overtime even though they are eligible for overtime pay under the ESA and some employees seek retroactive overtime pay after being terminated. Sometimes it makes sense to pay a terminated employee a little more money to avoid having this kind of issue litigated because if the employer is ordered to pay overtime for the one employee then employees who are similarly situated may start asking for overtime pay.

Until recently the conventional wisdom was that only employers with an Ontario payroll of over $ 2.5 M were required to pay severance pay to terminated employees with 5 or more years service. In a recent case however a judge concluded that the $ 2.5 million payroll was not limited to Ontario payroll. Since long service employees are entitled to up to 26 weeks severance pay under the ESA an employer should consider this potential liability before proceeding with an employee termination.

2. Has the employee signed an employment agreement with an enforceable termination clause?

If so, the employer must provide the notice of termination (and benefit continuation if applicable) set out in the contract.

As a result of recent case law, employees are increasingly challenging the enforceability of termination clauses. You should know whether your termination clause is likely enforceable before you decide to terminate; otherwise, you may end of paying much more termination pay than you expected.

3. If the employee has not agreed to a legally enforceable termination clause, how much notice of termination (or termination pay in lieu of notice) should the employer provide the employee?

This will depend on, among other things, the person’s age, length of service, position and availability of comparable employment given his or her education and experience and the employer’s best guess on how long it will take the employee to secure alternative employment.

4. Should termination pay be paid out as a lump sum amount or in a series of payments?

Unless this issue is addressed in an employment contract, this will depend on, among other things, whether the employer has cash flow constraints, whether the employee has agreed to restrictive covenants, and whether the employer can claw back termination pay if the employee secures alternative employment during the agreed upon notice period.

5. Should the employer provide a reference to the employee?

Generally, there is no legal obligation to provide an employee with a reference but it is often a good idea to do so if just cause is not an issue. For example, if the parties have not reached a settlement agreement then it is usually in the employer’s financial interest for the employee to secure alternative employment as quickly as possible. In this regard, providing a reference will generally help an employee find employment more quickly all things being equal.

Because of these issues and others, it is a good idea to spend a few minutes on the phone with an employment lawyer before you terminate an employee. It could save you thousands of dollars.

If you require assistance preparing an employee severance package for a terminated employee, please contact our Managing Partner, Doug MacLeod by phone at 416 317-9894 or by email at [email protected]