Can an employer offer a reduced severance package when they are in dire financial straits? What if it is the result of a global pandemic and its economic aftermath?
Or does the devastated economy mean that jobs are harder to find, and dismissed individuals should be entitled to greater severance than they would receive in good or normal times?
There is no question that the economic impacts of the COVID-19 crisis have been and will be devastating to many businesses, and many jobs will be lost. Many experts are predicting the worst recession since the post-war era, leaving individuals and businesses at all levels concerned for their futures.
While much of the discussion has focused on temporary layoffs and leaves of absence, many businesses have been forced to shut down and others have permanently reduced their workforce.
When an employee is dismissed due to economic circumstances, they will be entitled to compensation, often referred to as “severance”. Unless there is a clause in their contract setting out what they are entitled to in the event of dismissal without cause, they are entitled to “reasonable notice” or pay in lieu.
It is a common misconception that the “rule of thumb” for calculating reasonable notice periods is “one month for every year of service”. Reasonable notice is not based solely on an employee’s length of service; in fact, there are many factors that can impact the notice period. The primary ones are the “Bardal factors”, named after a case that is now decades old:
- Length of service,
- Nature of position/character of employment,
- Age of employee, and
- Availability of similar employment.
In an economic downturn such as the situation we are currently in, the “availability of similar employment” can become a critical factor in assessing severance entitlements. After all, the reality is that those who lose their jobs are less likely to find comparable work than they would be in typical circumstances.
On the other hand, how can an organization that can’t afford to keep all of its workers be expected to pay out substantial severance packages?
So how will the economic circumstances of an employer, an industry, or the economy as a whole impact notice periods? Does it mean shorter notice periods or longer ones?
Historically, difficult economic circumstances have tended to increase the length of notice periods. Canadian courts have been citing economic factors in this context since the depression of the 1980s. For instance, the BC Court of Appeal the 1985 case, Hunter v Northwood Pulp and Timber, said that “The lack of available employment opportunities resulting from a depressed economy is a factor to be taken into account.” However, they specified that “The economic factor must not be given undue emphasis.” The latter statement attempts to balance the rights of the employee and those of the employer. The courts understand that employers in these circumstances would also be experiencing financial difficulties and that extending notice periods too far would make the employer solely responsible for the lack of available positions.
Employers might be tempted to believe that financial difficulties justify reduced notice periods. However, arguments to that effect have been known to backfire. For instance, in Michela v St. Thomas of Villanova Catholic School 2015, three employees at the school were terminated without just cause due to low enrollment. They had worked at the school for varying lengths of time (8, 11 and 13 years). At trial, they each received six months of pay in lieu of notice, with the court taking into account the employer’s financial hardship. However, when the employees appealed, the Ontario Court of Appeal made it clear that financial difficulties do not justify a reduction in the notice period, as economic difficulties should not be the burden of the employee. While this principle has been upheld in Ontario and British Columbia, the rest of the provinces have remained silent on the matter. However, British Columbian and Ontarian precedents are usually quite persuasive, so we can expect these opinions to hold quite a bit of weight on a national level.
While the current pandemic is largely unprecedented, it is possible to make a few predictions about how our current economic state will affect notice periods. Given the judicial history, it is likely that notice periods will either remain consistent or be extended during these difficult economic times. It is also unlikely that employers will convince courts to reduce notice periods due to their financial challenges, at least in Ontario and BC. At the end of the day, courts recognize that employees should not shoulder the burden of economic hardships on their own and are likely to protect their rights over those of their employers.
Of course, all of the discussion about “reasonable notice periods” is irrelevant if you have a valid termination clause in your employment agreement. That is the best way for employers to reduce the cost of dismissing employees. We routinely work with our clients to put strategic contracts in place.
Conversely, if you are an employee being asked to sign an employment contract, you need to be mindful of what you are giving up by doing so. We can advise you so that you will make an informed decision.
Whether it is at the contract or termination stage, we can provide the strategic advice you need, so feel free to contact us.
Remember: if you think you may need a lawyer, you probably do!
