Hitting the ‘Sweet Spot’ – Some Tips on Preparing Fair Severance Packages

Discipline and Dismissals | Policies and Procedures | Severance

Letting an employee go is never a pleasant task. Even if the employee might be expecting the news, the employer can never know exactly how the employee will react and the employer needs to brace themselves for a range of emotions. For employers, aside from an employee’s unpredictable emotions, the other prevailing concern is the threat of potential litigation. Even if the employer believes that they have prepared a fair and accurate severance package, an employee might always turn around and pursue a claim for wrongful dismissal.

Ultimately the employer’s goal in preparing a severance package is risk mitigation. If they are set on treating the employee fairly upon their dismissal, then the strategy will revolve around formulating an offer so that the employee, while they may not be thrilled, will be satisfied enough not to proceed with legal action.

Tips for Preparing a Severance Package

Preparing a severance package should be approached strategically, with a proper understanding of the potential risks and options available. Contrary to popular belief, there is no set formula; it’s not a month per year, a week per year, or any easily calculated quantum. However, with our years of experience in helping clients craft such package, we wanted to offer some helpful tips.

Review the employee’s contract.

If the employee had a written contract that was prepared by a professional, it will usually spell out the amount that an employee is owed on termination. An employee should not be offered less than they have agreed to and cannot be offered less than whatever they are guaranteed under the Employment Standards Act (“ESA”). The amount stated in the contract (if there is one) creates a floor, but it does not create a ceiling. Note that many employment contracts, and termination clauses are, in particular, unenforceable; don’t assume yours will hold up.

Consider your consideration.

If the contract specifies what you owe an employee upon termination, that is the minimum amount you will need to pay them. However, an employer’s goal is to ultimately obtain a signed release, confirming that the employee accepts your severance offer and cannot pursue any sort of legal claim after. For that release to be valid, the employee needs to be offered some sort of consideration – or something of value above and beyond their minimum guarantee in exchange for their sign-off. This is usually an increase in the package, perhaps a few extra weeks or months, that they will not get if they do not sign the release.

Look at everything, not just wages.

For most employees, their salary may be the bulk of their compensation, but there are other elements as well. Many Ontario employees receive extended health benefits and some sort of bonus, which employment law dictates must also be included during an employee’s notice period, and these should be factored into their package. Other employees receive additional benefits such as a car or cell phone allowance, gym membership, or other perks. Employers do not need to leave an employee with a company car or cell phone after they are let go, but they may have to compensate them for the loss of the benefit. Courts have been consistently expanding the situations in which employees receive variable compensation or additional benefits post-termination.

If there is no contract, be generous.

The ESA outlines the legal minimums that an employee can receive, but a contract must be written very carefully to tie an employee to only receiving those minimums. If there is no contract in place, the employee may be entitled to a great deal more. Those amounts may be hard to speculate, but consider the employee’s age and seniority, their skills, and their likelihood of how long it might take to find new employment. This does not mean that you need to suddenly throw 2 years’ worth of salary at an employee, but you will most likely owe them something above their ESA minimums. Offering something extra can go a long way in obtaining a full and final release and to aid in mitigating the risk of future litigation.

Don’t make assumptions.

We often hear people say things like “He was only here for a few months, so we’ll give him a couple of weeks”. Some short-term employees are entitled to substantial severance, especially if they are in senior roles and/or were recruited from another employer.

Don’t always do it the same way.

Some employers always offer a lump sum, while others have a standard approach that is different. As the employer, you can decide whether to provide notice of dismissal, salary and benefit continuance, a lump sum, or a combination of the above. And you can approach each situation differently.

Consider offering a reference letter.

Many employers are frightened by the idea of reference letters. They worry that if the employee does not work out in the next role, they will be subject to some sort of legal claim for negligence or misrepresentation. Larger, more American-style employers are generally only willing to offer a ‘confirmation of employment’ letter, sometimes called a ‘tombstone letter,’ that simply restates the employee’s tenure and their duties. Yet if the employee was a great worker, a positive reference letter (and a verbal telephone reference to the same effect) may help that employee find new work sooner, which will also benefit you as that may reduce their severance entitlement.

Lastly, and above all else, call us first!

Our lawyers are well-practiced in reviewing employment contracts to see if they would legally protect employers in court, and crafting severance packages that hit an employee’s ‘sweet spot’ – where they are inclined to sign off and avoid a legal claim. We can review any existing contracts to assess if you can rely on them, explain your potential exposure, and we can discuss the options available to you to help move forward strategically.

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