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Severance Package Issues for Executives

If you are a long-standing employee for a company in a senior position, your entitlements to a severance package on a without cause termination of employment may be substantial. Employers may include deadlines in their offers of severance, as a means of pressuring a terminated employee to hastily sign the first severance offer without consulting an employment lawyer. It is important to note that severance package deadlines are not enforceable and the employer is required to provide the terminated employee with a reasonable amount of time to contemplate their options.  Prior to signing back any severance package, it is advisable to consult an employment lawyer to discuss your rights.

Lump Sum vs. Salary Continuance 

For many high-earning seniors executives, the total gross severance entitlement can be hundreds of thousands of dollars. For small and medium-sized organizations, paying out such a large lump sum at one time poses cash flow constraints, and the company’s preference is to continue the employee’s salary through the termination notice period. Under the Employment Standards Act in Ontario, employers have the right and employees the reciprocal obligation to accept a severance payout in the form of salary continuance payments.  Many severance packages may contain a “clawback” provision, whereby the payroll will immediately cease upon securing alternate employment, and the terminated employee has the duty to advise the employer regarding the same throughout the notice period.

Our advice is to remove any clawback provision, which can substantially reduce the ultimate amount of severance received by the terminated employee. The terminated employee does have a duty to mitigate its damages by searching for alternate employment; though it is hard to establish a degree of certainty as to how long it may take to secure this replacement job. Employers insert these clawback provisions in severance packages to protect against ‘overpaying’ former employees that are able to obtain new jobs relatively quickly after termination.  This is a key negotiating point that can greatly increase the amount of dollars in your pocket if addressed properly.

Does the Severance Pay Include Bonus?

Case law in Ontario is somewhat inconsistent with respect to an employees entitlement to bonus during the reasonable notice period.  We have written in previous blog posts regarding incentive pay entitlements subsequent to terminations. The general rule is that an employee is entitled to accrued bonus pay and that which would have been earned had they remained employed during the notice period. An exception occurs where an employers bonus policy clearly and unequivocally indicates that the terminated employee must be ‘actively employed’ during the time at which the bonus is paid out. Much case law in Ontario surrounds the wording of these ‘active employment’ clauses in bonuses policies; accordingly, it is important to have an employment lawyer in Ontario review your bonus clause and severance package offer to determine whether you are being offered what you deserve.

A number of other issues related to severance packages for executives will be explored in future blog posts. If you have recently been terminated from your employment and are seeking an employment lawyer in Toronto, please contact Goldstein Employment Law for a free consultation to discuss your rights. 

Will I Receive Any Funds If I Do Not Sign An Initial Severance Offer?

Clients call Goldstein Law Firm on a daily basis after being terminated from their employment. One of the common questions we receive from people is – if we do not accept the initial severance offer and alternatively enter into a negotiation or litigation against our former employer for wrongful dismissal, will we receive any funds during the proceedings?

Terminated employees are typically desperate for pay to bridge the time while they are unemployed; as such, people are often hesitant to reject the initial offer in fear that they will not receive any funds until a settlement is reached.  This is a popular misconception.  Irrespective of whether the employee agrees to the initial severance offer, the employer is required to pay the employees’ statutory entitlements in accordance with the Employment Standards Act (“ESA”), which includes up to 8 weeks of termination pay and, if the specific formula as governed by the ESA is satisfied, then one-week per year worked in severance pay; accordingly, if you have been employed for a substantial number of years prior to termination, your statutory entitlements can be significant.

After your statutory entitlements are fully paid by the employer, if the wrongful dismissal case is not yet resolved, employees that are terminated without cause are eligible to receive Employment Insurance (EI) benefits, subject to accumulating sufficient insurable hours prior to the termination. EI is another form of income replacement to bridge the gap following a termination. Should a settlement for wrongful dismissal be reached following the receipt of EI Benefits, Service Canada may calculate an EI repayment, which would require a portion of the severance package to be deducted based on the amount of EI received during the notice period.

Nevertheless, to summarize, employees are entitled to payments following a termination without cause, whether or not the original offer of severance is accepted. Such obligations are mandated through employment legislation in Ontario, which provides income support to terminated employees. Accordingly, the biggest risk to an employee is accepting an initial severance offer than falls well below their legal entitlements, thereby leaving potentially thousands of dollars on the table only because they are ill-informed.  As such, it is imperative that you consult with an experienced employment lawyer following the termination of employment to understand your legal rights.

Termination for Cause – Recent Example

As we have discussed previously in this blog, terminating an employee for just cause has been considered the ‘capital punishment’ of employment law. As such, the employee ought to have displayed misconduct so egregious to justify such a termination. The onus of proving just cause is on the employer.¹

Absenteeism and lateness, ² fraud, theft, dishonesty, or a series of improper behaviors can justify a termination for cause. The Court will apply a contextual analysis; considering the surrounding circumstances, such as the duration of the employment, the number of previous incidents of misconduct, the age and specialization of the employee, among other things.³

If an employer does not have cause for termination, then the employer is required to pay reasonable notice of termination or payment in lieu thereof. The factors considered by the Court in determining the length of reasonable notice include age, length of employment, seniority, specialization, and any other extenuating factors, as initially enumerated by the Court and as commonly referred to as the Bardal factors. In terms of an employees entitlements to termination pay in the event of a just cause termination, an employee is entitled to the minimum statutory notice as outlined in the Employment Standards Act (“ESA”), and, absent an enforceable termination provision limiting the employees’ entitlements upon termination to ESA minimums, reasonable notice of termination or payment in lieu thereof at common.

With respect to just cause terminations, the Court has held that the standard of conduct required to negate an employees entitlement to reasonable notice of termination at common law is lower than the high threshold of misconduct required to nullify an employees entitlement to ESA entitlements. In other words, employees that display gross misconduct may still qualify for minimum ESA entitlements, which can be rather substantial if a long duration of employment has accumulated, but at the expense of his or her common law entitlement.

If you have been terminated from your employment for cause, it is imperative that you consult with an employment lawyer about your rights and obligations.

 

 

¹Dowling v. Ontario (WSIB) 2004 CanLII 43692
² S. v. H. & D.P.M. Inc.,1999 CanLII 14865 (ON SC
³
McKinley v. BC Tel, 2001 SC 38

 

What Are An Employment Lawyers Fees?

Employers will typically underpay your severance package, relative to your entitlements under the Employment Standards Act (“ESA”) and common law in Ontario, as the employer hopes that a terminated employee will not seek legal advice to enforce their rights to a full severance package. If you hire an employment lawyer and your severance package does not comply with all statutory and common law obligations, you are likely to receive substantial additional funds from your former employer. Goldstein Law Firm has collected 100’s of thousands in additional funds for clients in employment disputes.

Free Consultations

We are, of course, always asked – what are your fees?  Fortunately enough, clients do not experience “sticker shock” when we explain our fee structure. Firstly, there is no obligation and the initial consultation is free. If you would rather advise us of your legal issues in writing, please feel free to fill out our confidential contact form here and Mr. Goldstein will respond to your inquiry shortly (without charge).

Contingency Fees

In the majority of employment law cases, we are retained on the basis of a free consultation and we typically charge clients on a contingency fee basis (i.e., a percentage of funds we recover on your behalf) in accordance with the guidelines set out by the Law Society of Ontario (LSO). If we are unsuccessful in negotiating a settlement or obtaining a more successful court judgment than originally offered by the employer, you will not be required to pay our legal fees*. Our fee structure is subject to exceptions depending on your case.

Employers Pay a Portion of Legal Fees

In the context of wrongful dismissal claims, employers are typically required to reimburse at least a portion of the legal costs incurred by the employee; accordingly, more monies will go into your pocket at the settlement of your case, and we are always sure to request employer payment of employees legal fees that arise from challenging the termination of employment.

For more employment law questions, feel free to contact Goldstein Law directly for an explanation of our fee structure.

*In the context of litigation in Ontario, an adverse costs award system require the losing party to pay a portion of the successful parties legal fees. In the event we commence a lawsuit to recover monies for you, we will explain in further detail the potential cost consequences.

Employment Standards Act Obligations

Under the Employment Standards Act (ESA), employers are required to provide employees minimum entitlements upon the termination of employment, which includes but are not limited to the following:

-Up to a maximum of 8 weeks of termination pay, calculated as one-week of termination pay per year worked; and

-If the employer has a payroll over $2.5 million and the employee worked for the company for 5 or more years, they would be entitled to severance pay equivalent to one week per year worked plus the fraction of the year worked prior to termination.

When you are terminated from your employment, the employer is obligated to provide these minimum ESA payments by your next scheduled pay date.  Employees’ entitlements to severance pay are greater than the requirements of the ESA, which only sets out the minimum standards. In fact, the common law, or judge-made law in Ontario, which reflect a series of cases in the employment law realm is what governs employees entitlements on termination.  According to this judge-made law, employees can be entitled to one-month per year worked, or more, termination pay, depending on the circumstances.

The Court will take into consideration a variety of factors in determining the quantum of termination pay required in the circumstances.  The factors include (a) age of employee; (b) likelihood and ease of re-employability; (c) duration of employment; (d) circumstances around the dismissal; and (e) specialization of the position and level of seniority at the company.  All of these factors are relevant to the analysis into the appropriate termination pay in the circumstances.

It is important to note that, when an employee is terminated, they may be offered the minimum requirements under the ESA, and asked to sign off on a Full and Final Release, preventing you from bringing any future employment-related claim whatsoever in exchange for accepting the initial offer. Based on our discussion, the ESA entitlements are a minimum, and the employee should be discouraged from signing the Release absent a consultation with experienced employment counsel. If you do, in fact, retain an employment lawyer to negotiate an enhanced severance package, the employer will still be required to pay your minimum entitlements owing under the ESA, irrespective of a signed Release, while the negotiation is ongoing.

If you have any questions or concerns about your severance package, please do not signed the settlement documents at first instance before consulting with an experienced employment lawyer regarding your rights and obligations.

Pension Benefits At Termination

As we have discussed in other blog postings, terminated employees are entitled to all forms of compensation for the duration of the reasonable notice period, including salary, bonuses, incentive compensation, stock options, RRSP contributions, employee benefits, and pension benefits.

When an employee is terminated, the employer is obligated to continue pension contributions for the duration of the statutory notice period as prescribed by the Employment Standards Act  (i.e., one-week per year worked, up to a maximum of 8-weeks).  Following the expiration of the statutory notice period, many employers will attempt to cut-off contributions to the employee’s pension plan, which can result in a substantial reduction in value of your pension.

Some pension plans require that the employee be ‘actively employed’ in order to qualify for employer contributions. Accordingly, if a severance package is negotiated whereby you continue to be employed by the employee by receiving severance pay on a salary continuance basis, this is generally sufficient to meet the definition of active employment for the purposes of qualifying for pension plan contributions.  Alternatively, some employers may wish to pay-out a one-time lump sum at termination on account of the pension loss, equivalent to the value of the lost pension contributions and the loss of the value of the pension at retirement.  A specialist actuary or valuator may be required to value the pension loss.

If your employer has not provisioned for pension payments in your termination package, please contact us today for a free review of your severance package and pension plan policy to ensure that you protect your rights.

Lump Sum Severance vs. Salary Continuance

When an employee is dismissed from their employment, the employer will often offer two (2) forms of severance payment – one lump sum payment representing all obligations to the dismissed employee; or a series of bi-weekly payments for a number of weeks.  There are a number of differences between the two forms of payouts, and it is always advisable to consult with an experienced employment lawyer to determine which payment method is more beneficial given your unique situation.

With respect to lump-sum payments, they can be classified as a ‘retiring allowance,’ which is a form of payment classified by the CRA, as on account of the loss of office or employment. Retiring allowances are taxed at a lower rate than regular bi-weekly pay, as CPP and EI deductions are not remitted for these forms of payments; accordingly, they increase the net take-home pay for dismissed employees.

Salary continuance payments may be beneficial, for instance, for employees that need to accumulate a certain number of insurable hours of work prior to termination.  For example, an employee that will be applying for EI Maternity Benefits requires 600 insurable hours of employment in the 52-weeks prior to the maternity leave.  If the employee is terminated with less than 600 hours, they could be paid out on a salary continuance basis, which would add towards accumulating insurable hours for the purposes of receiving maternity benefits.  Other employees may prefer to remain on salary continuance in order to receive some form of retirement benefits, pension vesting, or otherwise.

Accordingly, choosing between a lump sum payout or salary continuance is often dependent on numerous factors that should be considered by an employment lawyer before accepting any settlement offer.

What Are Your Employers’ Obligations on Termination?

Employers have various obligations upon terminating an employee from employment, including but not limited to complying with the Employment Standards Act, 2000, S.O, 2000, c.41 in Ontario.

If you have been terminated from your employment without cause, your employer is required to pay a minimum number of weeks of compensation in accordance with the Employment Standards Act in Ontario, equivalent to one-week of pay per year worked, up to a maximum of 8 weeks’ of termination pay. It is illegal for an employer to pay a termination package that does not comply with at least the minimum standards set out in the Employment Standards Act.

The minimum standards include a requirement to pay termination pay, severance pay, and continue employer benefits through the statutory notice period.  Termination pay must be paid on the basis of one-week per year worked, up to a maximum of 8 weeks.  Severance pay is different than termination pay.  Only those employees that have been employed for longer than 5 years for an employer with a payroll of greater than $2.5M will be entitled to severance pay upon termination of their employment. The Employment Standards Act governs the formula to calculate severance pay should you be entitled.

Employers are required to pay terminated employees their base minimum statutory entitlement 7 days after termination or on the employees’ next pay date, whichever is later.  This statutory pay must be distributed irrespective of whether the employee has executed a signed release, which an employer will typically require in order to formalize the severance.

Employees that are employed in certain designated, federally regulated sectors (i.e., telecommunications, banks, airlines, etc.) are entitled to benefits as outlined in the Canadian Labour Code, which codifies a set of employer obligations upon terminating employees in the designated sector.  Many of the rights and obligations therein are similar to those enumerated in the Employment Standards Act.

If you have been terminated from your employment, consult with an experienced employment lawyer to determine if your employer has upheld its obligations on termination.