Severance Packages

One of the most common questions an employee asks after their employer terminates them is as follows: “how much of a severance package am I entitled to?”

The purpose of this article is to explain what severance packages are, what they are based on, what they include, and their various structures.

What is a severance package?

To explain what a severance package is, we must first explain some basic employment law principles.

First, there are two types of terminations: “without just cause” and “with just cause”.  While we discuss what constitutes a with just cause termination more fully in our “Dismissal with Just Cause” section, a simple definition is as follows:

[with] [j]ust cause is conduct on the part of the employee incompatible with his or her duties, conduct which goes to the root of the contract with the result that the employment relationship is too fractured to expect the employer to provide a second chance.1

In contrast, a “without just cause” termination is simply a termination that doesn’t satisfy the above test. For example, if an employer terminates an employee because of lack of work this will be a “without just cause” termination.

While employers are free to terminate employees without just cause at their discretion, there are some safeguards that help to protect the employee. For example, there is an implied term2 in every employment agreement requiring employers to give employees common law reasonable notice of termination. Courts determine an employee’s common law reasonable notice period based on various factors such as age, length of service, and character of employment.  

However, in practice, most employers terminate employees effective immediately without providing them with notice at all. When this happens, the employer has breached the implied term of reasonable notice and is liable to the employee for the damage that results. This damage is typically everything the employee would have earned had appropriate notice been given. These damages are also more commonly referred to as “pay in lieu of reasonable notice” or a “severance”. The amount of “pay in lieu of notice” or “severance” an employer offers an employee is a “severance package”.

With that said, when an employer terminates an employee effective immediately (such that the employer has breached the implied term of reasonable notice), employees also have a corresponding obligation: to “mitigate” their damages. This duty requires employees to take reasonable steps to search for comparable replacement employment. If the employee actually locates and commences work then the pay received reduces the employee’s claim dollar for dollar during the notice period. In contrast, if they are unable to find work throughout their notice period then their claim remains fully intact.

As we will see below, the principles of mitigation often impact whether an employee accepts the severance package their employer is offering them.

Example applying the above principles

While the above principles are helpful, an example is sometimes even more useful to understand what how they work in practice.

Suppose that “John” is 35 years old, was an employee of “Employer X” for 6 years, and that he held a technical position without any managerial responsibility. John’s compensation included (i) a base salary of $60,000 (ii) RRSP matching of 4%; and (iii) an annual “discretionary” bonus, based on each calendar year, that was always between $10,000-$15,000. Lets also assume that John’s employer terminated him on October 31, 2017 and that his employer offered him a $20,000 severance package. John’s employer gave him a deadline of one week to accept the offer and John is now wondering whether the severance package his employer offered him is fair.

To answer this question, we must determine three things:

  • The amount of reasonable notice John was entitled to;
  • What he would have earned had his employer provided him with that reasonable notice; and
  • The likelihood of John obtaining replacement employment in the near future.

According to case law where the plaintiff (other employees) had similar characteristics to John, it is likely that his reasonable notice period is between 5-7 months.

As for the second question, John would have earned the following over the next 5-7 months in respect of salary and RRSP matching:

 

5 months

6 months

7 months

Salary

$25,000

$30,000

$35,000

RRSP matching

$1000

$1200

$1400

Total Salary + RRSP

$26,000

$31,200

$36,400

In addition to the above, it is likely that John would have earned a bonus had his employer given him any of the above notice periods because (i) John had earned a bonus in every year of his employment making it likely that this pattern would continue; and because (ii) all of the notice periods in his range place him beyond the end of the calendar year (December 31, 2017), the end date for John’s 2017 bonus.  Therefore, it is likely that John would have earned a bonus similar to what he did in past years, between $10,000 and $15,000.

John’s total earnings had his employer given him reasonable notice, would therefore be approximately the following:

  • $38,500 in respect of 5 months;
  • $43,700 in respect of 6 months; and
  • $48,900 in respect of 7 months3.

As for the final question, it is not mathematical nor legal in nature. Instead, John must determine how likely it is that he will obtain re-employment within his notice period. If, for the purposes of this example, we assume John’s re-employment prospects are poor, then his employer’s severance package of $20,000 is unfair such that John would likely want to reject it and pursue the full $38,500-$48,900 calculated above.

The structure of a severance package

While the total dollar value associated with a severance package is the primary concern, its structure is also an important consideration. Generally, employers structure severance packages in one of three ways. 

The first structure is a “lump sum” settlement offer. For example, if John’s employer offered him a $20,000 severance package as a lump sum, and John accepted it, then he would receive the entire $20,000 in one payment soon after his acceptance. Because of this structure’s immediacy, the mitigation principles discussed above come to an end and any income John earns thereafter will have no impact on his severance package.

The second structure is a salary continuance which has two major differences from the lump sum severance package offer described above. Specifically, if John accepted a $20,000 offer as a salary continuance:

  • John’s employer wouldn’t pay it to him all at once, but instead at regular intervals according to his regular salary; and
  • There would likely be a term in the severance package offer that requires John to report back to his employer in the event he obtains re-employment (a mitigation term). Upon doing so, there is typically a “balloon payment” in which John’s salary continuance stops and his employer pays him 50% of whatever remains on the salary continuance.

Because of the mitigation term, a fair severance package in the form of a salary continuance would typically be the high end of an employee’s reasonable notice range, in John’s case—7 months.

Third, an employer may also choose to provide an employee with some actual notice with an additional offer of either a lump sum payment or a salary continuance.  Because the employee is receiving some working notice, the actual severance package portion of the offer (either the lump sum or salary continuance) would undoubtedly be lower than a situation where the employer terminated the employee effective immediately.4

Lastly, no matter what form the severance package offer is in, every employer will make the offer subject to the employee signing a “release” which will stop the employee from suing his or her employer in the future.

While this is perfectly normal, some employers add additional terms and conditions to a “release” that have nothing to do with stopping a future law suit. These terms include non-solicitation clauses (a clause that restricts the employee from soliciting their former employer’s clients), non-competition clauses (a clause that restricts the employee from obtaining re-employment at one of their former employer’s competitors), and many other types of clauses.

Therefore, depending on a certain employee’s situation, the wording of the release may be even more important that the severance package their employer is offering—particularly where the employer adds terms that would restrict an employee’s future employability.

Our Process

If you have been terminated, a consultation with one of our lawyers will help you determine whether your employer is treating you fairly and in accordance with the law.

In every case, our firm’s main objective is recover the most severance and other compensation possible in the shortest amount of time. To achieve this outcome, all of our employment lawyers use a well-tested process for getting these results:

Step 1. A thorough legal consultation where our lawyers will sit down with you or connect with you over the phone to review the facts of your case, explain the legal issues to you, and outline your options to recover fair compensation (any fee for the consultation is tax deductible);

Step 2. We prepare a Reasonable Notice Assessment to calculate how much compensation you may be owed, and research previous cases that are relevant to your case;

Step 3. We prepare a Legal Argument for you based on the specific facts of your case, and how the law applies to your case, and why you are entitled to compensation or some other remedy;

Step 4. We incorporate the Legal Argument into a Legal Demand which is delivered to your former or current employer which proposes a Settlement. This Legal Demand will have a deadline by which the employer must respond failing which a lawsuit may be commenced.

Step 5. All of our lawyers are trained and experienced in employment law negotiations, and we will bring all of these skills to bear in order to achieve the most competitive settlement possible.

*Our lawyers are very successful in generating settlements using the above process, however, if a settlement cannot be reached, our lawyers will aggressively advocate on your behalf using the courts, the Alberta Human Rights Commission, Employment Standards, or Arbitration.

1 Leung v Doppler Industries Inc. [1995] BCJ No 690 (BCSC).

2 Note: Employers can replace this implied term with an express provision reducing or even eliminating an employee’s common law notice, but such provision must satisfy certain requirements to be enforceable, including limiting language that’s clear and unambiguous.

3 I assumed an average bonus of $12,500 for all of these totals.

4 Note: the employer can also provide the employee with working notice for their entire reasonable notice period. So long as the employer provides the employee with enough notice, the employee wouldn’t be entitled to a severance package at all.

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