When Are Defined Severance Terms Unfair

When Are Defined Severance Terms Unfair?



It is hard to win a game when you start with a disadvantage. Yet when signing employment contracts, employees constantly set themselves up for failure. How? By routinely permitting employers to draft and dictate almost all of the important contractual terms, especially the conditions surrounding severance terms. Companies understand that they can vastly reduce severance liability and wrongful dismissal damages with a properly worded severance clause. Therefore, many employers have now designed their contracts to limit employee termination payouts to the least amount possible.

Without a written agreement, employees terminated for any reason other than misconduct are entitled to a fair and reasonable severance package, calculated with reference to their age, position, tenure and how long it ought to take to find a comparable job. For example, a 45-year-old manager with 10 years’ service could expect to receive between 8-12 months’ notice of termination or severance pay. However, the severance terms could limit this same individual to only one week of pay for each year of employment. Therefore, the impact these clauses can have on employees is severe.

How can employees spot when a termination clause or severance terms are unfair?

Minimums only. An employer can draft a contract to state its employee will exclusively receive whatever statutory termination terms and payments are required by the applicable provincial or federal employment standards legislation. These clauses are the most harmful as many employees mistakenly view these minimum rights as just the starting point of their entitlements, not the maximum. But these types of clauses are intended to limit them to only these amounts, not more.

Static payouts. Some severance clauses appear fair from the outset but then become much less so over time. A guarantee of nine months’ severance could be a generous payout during the first several years of employment. However, after many years of work the severance payout remains the same. These clauses become far more problematic the longer someone remains employed.

Elevator clauses. These clauses grow in size to coincide with tenure. For instance, after each year of employment, the employee receives two weeks’ separation pay. But beware – while these terms can appear more favorable than minimum clauses, many can be designed to offer little more than those amounts. For example, Ontario’s employment standards legislation mandates that in certain situations, employees receive a minimum of two weeks of compensation upon termination. Thus, a severance clause that guarantees them this amount does no more than what was already required.

Capped amounts. These are similar to elevator clauses, except they stop growing at a certain point. This is the problem. For example, an employee will receive one month’s pay for each year of tenure but only to a maximum of nine months.

Base salary only. Severance packages should be built upon whatever amount of pay an employee would have received but for his or her termination. This includes bonuses, commissions, benefits, car allowance or any other form of regular pay. However, beyond the minimum statutory rules, severance clauses are increasingly attempting to limit payouts to employees’ base salary only, excluding all other forms of payment.

Re-employment. Without a defined clause, severance packages are payable only to the extent the employee remains unemployed. Except for statutory minimum amounts, any money earned through re-employment activities can be offset against the severance owed. Part of the trade-off when agreeing to a severance clause is the employee will know the exact amount of pay he or she will receive. However, employers are now drafting severance clauses that provide for limited severance entitlements and still permit them to deduct some amounts earned through re-employment. In effect, the employee then loses out both ways.

Ambiguity. Despite the different methods for defining severance, by far the biggest problem I see is that there are so many methods of writing these agreements that it can be hard for the average person to understand just what they are being offered.

What can employees do when presented with a severance clause? First, do not be reluctant to negotiate the terms. Employers often use template language in their contracts and many will reconsider that language and provide something more reasonable rather than risk losing out on a candidate that they wish to hire. Second, severance clauses are becoming increasingly complicated and difficult to understand. Make certain to view the impact of the clause with the right perspective. This requires an understanding of what your rights are without a severance clause, compared to what that clause is attempting to do. Most workplace lawyers provide such a service for a nominal fee.