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How do you determine severance/termination pay for a dismissal without cause?


I’m Stuart Rudner and this is another Rudner Law video employment law update.

Today we’re going to talk about how you determine what someone is entitled to if they lose their job without cause, what we usually refer to as severance or termination pay.

Now like it or not the entitlement to severance is not based upon a simple formula or an easy calculation in most cases. It’s not a month per year as a lot of people say. In fact it’s not only based upon length of service, it’s based upon a number of factors. Going back many decades, our courts made it clear that the primary factors are the individual’s length of service, their age, the nature of their position, or character of their employment, and the availability of similar work, but they also made it clear that this list is not exhaustive. In fact there are dozens of other factors that courts have considered over the years, probably the most common one being inducement. If you’re lured away from another job, that will be an important factor. It’s also important to note that the economic condition of the company, the industry, or even the global economy, is not a relevant factor that will be taken into account and will not serve to reduce the employer’s obligation even if they are financially struggling. This lack of predictability often results in unnecessary time being spent on disputes, on negotiation, and on litigation, because in many cases the employer’s lawyer will assess the case and advise a notice period that is far less than the employee’s lawyer thinks is relevant, and if we’re fighting over a severance based on common law then it’s an art and not a science and it does depend on which judge you get if you go to court which means that there is room for negotiation and debate.

All of this of course can be avoided with a well-drafted contract that includes a termination clause and that’s what we work with our corporate clients to do, so you can avoid all this uncertainty and unpredictability. Getting back to the common law though if you don’t have an enforceable termination clause that you’re relying upon, everyone is entitled to reasonable notice and as I’ve said, that’s based upon a number of factors. It’s important to note that our courts, including the Ontario Court of Appeal, have confirmed that the maximum is generally 24 months of severance or two years in the absence of exceptional circumstances.

So first of all that tells you that the severance entitlement can be quite extensive especially for longer term employees. Recently the Court of Appeal had the chance to revisit this issue and talk about what exceptional circumstances might look like. So in the recent decision of Currie and Nylene Canada Inc., the trial judge had given this employee 26 months of notice and it went to the Court of Appeal and one of the issues was whether this was an appropriate case for the courts to go beyond the cap of 24 months and in that case the Court of Appeal referenced a number of factors which justified going beyond 24 months. First of all we had an employee who left high school at the age of 18 to start work with this company and worked there for their entire career, they worked there for more 40 years and they were 58 years old when their employment was terminated, so nearing the age of retirement, and the court took note of the fact that the work landscape, in fact our society as a whole had evolved substantially since the last time this person had to apply for a job. Their experience was quite limited to the company they worked for for 40 years, their skills were not easily transferable, in fact they had very little computer skills, which in 2021 are obviously quite important, so given the employee’s age, given their limited education and skill set, and given the fact that the termination was equivalent essentially to what the court called a forced retirement, they agreed that there were exceptional circumstances that justified going beyond 24 months and 26 months was appropriate. So that’s an example of where the courts will go beyond 24 months of severance.

On the other hand, we have another reason case this time coming out of British Columbia where we have another long service employee and many of us would have assumed that just because of the length of service they would get that 24-month maximum. In this case we’re talking about a 58-year-old, an individual with a housekeeping position in a resort, 32 years of service. In this case they were able to find new work fairly quickly but not entirely comparable work and the court found that 18 months of notice was the appropriate amount. So as I said before this is very much an art not a science but I think many of us would have expected the courts to award at least 22 months if not 24 in that case. So it’s important to note that one of the important factors there was the nature of the position.

So again it’s not just length of service, it’s not just a month per year, the availability of similar employment can be a very relevant factor, but courts will not make assumptions and this has become a very big issue over the last few years as we deal with the COVID pandemic. Initially many employees were alleging that because of the pandemic it was even harder to find new work and therefore the notice periods should be extended. Conversely in the last little while we are hearing of tremendous labour shortages in many industries, so employers are saying that the notice period should actually be reduced to reflect the fact that it should be fairly easy for employees to find new work. The bottom line is that courts are not going to make any assumptions, they want to see evidence, they want to see evidence of job opportunities or the lack thereof, and then they will make their decision as to how the availability of similar work will impact the notice period.

Of course this issue overlaps somewhat with the duty to mitigate because employees who are let go have a duty to make reasonable efforts to find new work and it’s not unusual to have an employee saying that they have made diligent efforts and there’s nothing out there, and to have the employer saying that there’s lots of jobs out there and if the employee really wanted to find work they would have. Again it comes down to evidence. Employees are going to need to show that they made legitimate efforts to find new work, and if employers want to try to have either the notice period reduced or a finding that the employee didn’t mitigate properly, they’re going to have to come up with evidence of job opportunities that were reasonable for the individual both geographically and in terms of the nature of the work, and also essentially show that it’s likely that if these employees had applied for those jobs they would have been able to successfully find new employment.

Bottom line is that by default the law requires that employers provide reasonable notice and if there is no enforceable termination clause in the contract that means reasonable notice of dismissal, which can be up to 24 months as I’ve said or more in some cases, this is very much an art not a science. There are no formulas which means that in many cases we have disputes, negotiations and litigation over how much severance someone is entitled to. And as I’ve said many, many times there is a simple way to avoid all of this uncertainty. A well-drafted contract with a clear termination clause. There have been lots of cases over the years where courts have found that clauses were not enforceable and frankly I would say the majority of termination clauses that we review are not enforceable and would not stand up if challenged. But we can help employers to ensure that their clauses and their contracts are strategic and are effective.

So if you’re an employer please let us help you to make sure that your contracts are strategic, effective and enforceable if challenged. And if you’re an employee and you’re being asked to sign a contract please come to see us and let us review it with you to make sure you understand what you might be giving up. Far better to find out at the time that you’re receiving an offer than to find out many years later that you gave up possibly tens of thousands of dollars because of the contract you signed many years earlier.

That’s all for today thanks and have a great day.

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