Q. How are severance packages generally determined? I was just laid off from my job of 10 years and want to know what I and some of my co-workers are entitled to. Should all employees receive the same severance package and what are my options if I feel I deserve more?
— Connie Brent
A. Thanks for your letter, Connie. There are several factors that go into determining a terminated employee’s severance package. I outline them below as well as give you suggestions on what to do if you feel you deserve more than you’ve been offered.
The starting point for determining what an employee is entitled to upon termination by the employer is whether the employment relationship is being terminated “with cause” or “without cause”. For this article, I will assume the termination is “without cause”.
In a without-cause termination, the starting point is whether the employee’s termination entitlements are defined in a written contract of employment.
Termination with a written employment contract
Having defined termination entitlements means that the employment contract sets out what the employee is entitled to upon termination.
These entitlements can vary quite a bit. On the high-end, employees can have defined entitlements that are greater than what a court would award. On the low-end, employees can be entitled to only the minimum requirements under the Employment Standards Act (ESA).
It’s worth noting that employees can enter into a contract the uses the ESA minimum entitlements but a provision providing for less than the ESA minimum entitlements will be void.
It’s also worth noting that defined entitlements are often straightforward such as the employee is entitled to one month of pay in lieu of notice per year of service but can also be quite complicated, involving anything from stock options to payments based on the performance of a whole department.
The key thing to understand when it comes to how this type of written employment contract relates to a termination of employment is that the employee made a deal defining their termination entitlements when they started their employment. It might be a good deal or it might be a bad deal, but they already made their deal and the termination is just a matter of carrying out what the parties already agreed to.
Termination without a written employment contract
If the parties didn’t enter into a written contract of employment, the employee is free to choose between their entitlements as set out in the ESA or their common law entitlements. The employee’s common law entitlements are going to be greater so they will choose that system.
Under the common law system, employees are entitled to notice of their termination or pay in lieu of notice of their termination. This is an estimate of how long it should take that specific employee to find a new similar job and it is the same whether dealt with as notice or pay in lieu of notice.
Many employees are surprised to learn that the employer, not the employee, is able to choose whether to pay the employee for the notice period or to notify the employee that they are to work until a particular date in the future following which their employment will be terminated. This is called working notice. I normally don’t recommend it from the point of view of the employee or the employer because it almost always results in problems.
In situations where the employer has elected to provide the employee with pay in lieu of notice rather than working notice, the notice period, which is an amount of time that is typically expressed in months, is converted in dollars. I normally tell clients to think about this as being how much is a month worth to them or what would they make in a month.
Employees will normally want this to be paid as a lump sum but there are a number of strings that can be attached, particularly in terms of reducing what is paid based on the employee obtaining a new job.
What are my options if I feel I deserve more?
Employees should get legal advice on whether a severance package is fair before signing anything. I would emphasize that this is important regardless of whether you think you deserve more because it can be hard to tell whether the offer is in fact fair.
If the offer is fair, we can make sure that you understand why the offer is fair as well as the terms that you are agreeing to. If the offer isn’t fair or the terms are a problem, we can go over your options and come up with a plan to change that.
In addition, in many cases, employers will also contribute to the legal fees incurred by the employee.
I have met with a number of employees over the years who have accepted offers that they should not have and a number of employees who have been offered more than their employer should have offered. Getting legal advice before agreeing to anything really is the single most important thing to understand when presented with any severance package.
Scott Hawryliw is a civil litigation lawyer with SRH Litigation in Barrie, Ont. He helps clients with legal problems related to injuries, employment, and business issues and can be reached at [email protected]
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