Strategies for severance success
Author: Daniel A. Lublin
Since employees have no legal entitlement to continued employment, Canadian employers get to call all the shots. Aside from allegations of discrimination, an employee’s only job security exists in the form of advance notice of termination or pay in lieu of notice.
Despite this advantage, employers frequently bemoan the amount of severance they offer. Relying on the traditional factors to calculate severance —
age, length of service, the type of position held and the prospects of re-employment– they arrive at a figure.
However, while theoretically correct, this approach is practically faulty. Following it, without considering more, will invariably lead to mistakenly overpaying an ex-employee and offending the bottom line. But something can be done. Although I can’t guarantee that my approach is infallible, by introducing these measures, employers will save costs more often than not. Therefore, I offer the following tips for those employers who are motivated to limit the amount of severance they pay:
- Never use a formula: Employers who calculate notice based on a fixed formula, such as one month per year of service, risk overpaying, especially to long-service employees. Not only does this approach overlook any unique circumstances, but fixed formulas have little, if any, correlation to the notice a court would select. I am familiar with over 100 factors a court could consider to assess proper notice, many of which will reduce the amounts paid.
- Implement contracts with termination provisions: Freedom of contract still prevails. Employers can displace the obligation to provide “reasonable” notice if an employment contract properly specifies some other amount. When acting for employers, I will strategically select an amount that is more than the employee’s minimum statutory entitlement but less than he or she would receive if the matter were not addressed.
- Build a documentary file: Courts should not consider poor performance unless cause for termination is asserted. While unmeritorious allegations of cause are rarely followed through to trial, if properly asserted, documented and argued, they can help employers leverage their position in settlement negotiations by raising the apprehensions of an employee, now more frightened to go to trial.
- Provide a proper reference letter: Many employers favour the simple name-rank-and-file approach to supplying a reference letter. For employees with satisfactory performance records, I see no good reason to do so. A practical and proper reference is an invaluable tool, used by employees to find other work. Once this occurs, an employer’s obligation to pay severance is reduced, if not eliminated altogether.
- Consider working notice: In my experience, nothing stimulates an employee to find other work faster than formally knowing that his or her current job is a dead end. When he or she finds another position before the expiry of the working notice period, the employer is off the hook for severance payments that would otherwise be paid. Moreover, employees given working notice are obliged to continue to perform their jobs, and thus, continue to contribute to the organization.
- Don’t pay a lump sum: If working notice is not feasible, provide salary continuance to a dismissed employee, not a lump sum. Then, if the employee finds another job during the salary continuance period, the employer can cease further payments, or pay only the difference if the new job pays less.
- Add a “clawback clause”: If following rule number 6, the employer can provide an incentive to an employee on salary continuance to find another job, instead of lingering on the payroll and, in some cases, not even looking for new employment. I usually counsel employers to provide 50% of the remaining amounts that would have been paid, had the employee not found another job, if and when she does find one. If an employer does this, I frequently find that the total payments made are less than if a clawback did not exist.