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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. 

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