The ins and outs of job severance

Date: Wednesday, April 4, 2012
Author: Daniel A. Lublin
Publication: The Globe & Mail
Most employees cling to beliefs about workplace rights from media, friends or the Internet. But many of these “perceived” rights often do not exist. Here are some common misconceptions regarding severance and the law of dismissal.

Is severance based on legislation?

Some employees mistakenly believe that, upon dismissal, they are entitled to no more than the statutory right to severance found in employment standards legislation. There may be a few situations where only the employment standards payments are sufficient – such as for minimum wage or transient employees – but the remaining 95 per cent of the work force should not accept just the minimum. 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. This is referred to as a reasonable notice period. In most cases, employees are paid salary in place of this advance warning, which is commonly referred to as severance, and it is almost always more than the minimum amounts prescribed by legislation.

Calculating severance

Another common misconception is that the amount of severance is based on a rule of thumb, such as one month of pay for every year of employment. In reality, 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, tenure, and legal precedents. This is because the seniority of a position is often disputed and the period of time it should take someone to find another job is both arbitrary and subjective. For example, one of my clients 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. This raises another good point: Judges are human, and the “likability” of employees, employers – and even their lawyers – often affects their decisions.

Relinquishing rights

Employees can contract out of fair severance, and they unknowingly agree to do this all the time. Many new hires 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 they find there is no other choice. Either way, even if a contract provides for something less than what is fair, a court will enforce it as long as it is properly drafted and agreed to.

No double-dipping

Employees who acquire another job before their severance period expires 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.

Not up to scratch

Another widely held believe is that poor performance is cause for dismissal without severance. This is incorrect. It 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 amount of severance awarded is not based on performance, so both stars and incompetents should receive the same payouts if fired.

‘We just don’t like you’

There is no need for a “good” reason to terminate. Otherwise, no one would ever be fired. In reality, an employer does not need any reason to let someone go 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 any more.” 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.

Contracted work

Consultants or independent contractors have not traditionally received severance but even this is now changing. 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 amount awarded will be less than what genuine employees receive.

Union protection

People believe that 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 because of restructuring.

EI benefits

It is a commonly held belief that employees who are terminated do 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 laid off, downsized, fired for poor performance, or lose their jobs because of a restructuring are all eligible for Employment Insurance.

Retirement and severance

Employees who retire have no right to 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.

Reference rights

There is no right to a letter of reference, no matter how commendable the employee’s service. 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.

Take it or leave it?

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 at 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.