Severance Packages and “Clawback” Provisions

In wrongful dismissal situations, many employers provide dismissed employees with severance packages that consist of a salary continuation.  Of course employees would usually prefer to be paid a lump sum, but usually, they are just not entitled to a lump sum under Canadian law.  Dismissed employees are entitled to be paid the minimum amounts under the Ontario Employment Standards Act, 2000, which include termination and severance.  The rest of the damages that they are owed are paid “in lieu of” reasonable notice.  This means that dismissed employees are only entitled to the payments, strictly speaking, if they have not found other work.  If they do find work and they have not yet settled with their former employers, the employers are entitled to credit for any amounts earned by the former employee during the notice period.

Most employers (and employees) do not want to wait and see how long it might take to find other work.  They want things resolved and out of the way.  So employers will often provide a salary continuance arrangement that provides some incentive for the employee to look for work and find a new position.  Usually, it is 50% of the remaining severance amount that they might have been paid. This is considered a reasonable provision and many employers will refuse to delete these clauses.  Nevertheless, most employees view these incentive payments as a “clawback” on the amounts that they are “owed” and become very upset with these provisions.  Some employers simply are very insistent on including these provisions as part of any severance arrangement.

Nevertheless and with that in mind – here are a few things you can consider when faced with a salary continuance proposal:

1.  The Length of the Notice/Severance Period:  Just because an employer has chosen some arbitrary number as the number of weeks or months that it will provide as a notice and/or severance period, that number may not be written in stone.  It may be quite flexible.  Sometimes employers will low-ball employees, hoping that they do not take any further steps.  Employees are often more likely to get the notice period increased than to get the “clawback” removed.  Many employers will increase proposed severance packages after receiving a letter from legal counsel.

2. Definition of Mitigation:  Some employers will state that the 50% payout will be triggered if the employee finds any work – even part time, consulting or temporary.  Empoyers are often willing to negotiate changes to these clauses so that the 50% will only come into effect if the employee has found a reasonably comparable employment or self-employment opportunity.

3.  What’s Included?:  Sometimes employers will offer a salary continuation on the basis of base salary alone.  Employees are entitled to be provided with benefits continuation, pension contributions, bonuses and other amounts that they would have earned if they had continued to be employed – even the severance arrangement is a salary continuation package.

4.  Other Items:  Employees should be able to get some other items included in their severance packages – like outplacement assistance through a decent agency and reasonable legal fees to have a package reviewed.  As well, some employers will provide a helpful reference letter though they cannot really be forced to do so.

The items listed above are items that employers will often consider changing, adjusting or adding.

It is fair to point out that, despite anything I have said above, some employers will be open to removing the salary continuation provision and paying out a lump sum.  They will usually want some concession in exchange – for example a lower overall amount or the agreement not to pay some of the “extra items” listed above.  But it is often  worth trying.

Other employers will not budge on anything and will tell employees to take the package or bring a lawsuit.  Employees then have to make a decision as to whether it is worthwhile to start a legal claim.  This can be a difficult decision, especially since neither the employer, the dismissed employee or the lawyer know how long it might take the employee to find new employment.

Nevertheless, in situations where employers have provided low-ball offers and are not willing to budge initially, dismissed employees will often come out ahead by proceeding with a Statement of Claim (i.e. filing a lawsuit in court).


Wrongful Dismissal: Supervisor awarded 20 Months

When dismissing large numbers of employees, employers use widely different strategies.  Some employers choose to provide relatively fair severance proposals, negotiate if necessary, and minimize their legal entanglements.  Other employers choose to offer low-end severance arrangements and fight vigorously over any improvements to the severance packages they have offered.  While employer-side legal counsel certainly benefit when employers use the latter strategy, their employer clients do not always come out ahead, even with the costs saving that they might achieve by convincing some employees to accept low ball offers.

One employer that used this latter strategy, seemingly to the extreme, was Canac Kitchens, a Division of Kohler Ltd.  After closing its manufacturing operations in Canada in 2008, it fought with its former employees  tooth and nail over appropriate severance awards in a number of wrongful dismissal cases.  It took many of these cases all the way to trial and wound up with numerous reported court decisions, most, if not all of them, ruling against Canac’s position.

One of the wrongful dismissal cases from 2012 involved Washington Olivares, a shipping supervisor, who had been with Canac for 24 years.  At the time of his dismissal he was 48 years old, earning approximately $93,000.  When he could not resolve his dispute with Canac, he brought a summary judgment motion and was awarded 20 months’ compensation.  A few issues were decided in this case that could be helpful to other dismissed employees:

1.  Notice:  Justice Lederman of the Ontario Superior Court held that a long service employee is entitled to a lengthy notice period, even if he was not in an upper management role.  In coming to this conclusion, he relied on the decision of the Ontario Court of Appeal in DiTomaso v. Crown Metal Packaging, which I wrote about last year.

2.  Overtime Pay: The Court held that if an employee was routinely earning overtime pay before being dismissed, the employee will be entitled to common law severance pay on the basis of average overall earnings, including overtime pay, even if the employer can show that overtime pay was declining or that it may not have paid overtime pay in the future.

3. Mitigation:  The Court also clarified that any money earned by a dismissed employee during the statutory notice period (the first 8 weeks, for an employee with at least 8 years of service) and the statutory severance period (the next period of up to 26 weeks, depending on length of service) will NOT be deducted from the employee’s overall settlement.

4. Benefits:  The Court also held that, in assessing wrongful dismissal damages, employees are entitled to the full value of an employer’s monthly cost of employee benefits, even if the employee did not use them all while employed.

Essentially, it appears that Mr. Olivares won each of these disputes with Canac.  As well, he was awarded legal costs of $10,500.  The amount is not huge since the litigation was conducted as a summary judgment motion with no cross examinations or other procedural steps.

I was not involved in this wrongful dismissal case and I am not aware of what kinds of offers the parties may have exchanged before the hearing.

However, in many of these wrongful dismissal cases, employers can achieve a much better result by settling out of court and minimizing the legal fees that they may have had to pay.  The flip side is that if employers make reasonable offers to settle before trials or hearings, it will become much riskier for dismissed employees to proceed with litigation since they may face an award of legal costs if the employer does better than its settlement position in court.

Very few wrongful dismissal cases actually wind up going to trial, which is probably a good thing for most employers and their dismissed employees.  The fact that Canac now has so many reported decisions, most of them decided against Canac, suggests that this strategy of fighting every single case vigorously is not necessarily the best strategy to employ.











Wrongfully Dismissed Employees May Be Required to Return to Work if “Recalled”

Can an employer “recall” an employee back to work as a way of avoiding a wrongful dismissal lawsuit?  Even if the employee was wrongfully dismissed?  Since the Supreme Court of Canada’s decision in  Evans v. Teamsters Local Union No. 31 (Joblaw blog: Evans), this has become a serious strategy for some employers, especially if the offer is seen as one that was made in good faith.

In a recent case of the Ontario Superior Court, Chevalier v. Active Tire & Auto Centre, a wrongful dismissal case brought by a 33 year employee was dismissed for failure to return to work.

The plaintiff, Earl Chevalier, a service centre manager with Active Tire, was placed on a lay-off with minimal notice and no compensation.  Mr. Chevalier wasted no time in suing Active Tire for wrongful dismissal two weeks after being dismissed.  He claimed that he could not be “laid-off” with no pay  and that this was a constructive dismissal.  In response to the lawsuit, Active Tire wrote to Mr. Chevalier, apologized and asked him to come back to work.  Mr. Chevalier elected not to return to work and instead proceeded with his law suit.

At trial, the Court agreed that Mr. Chevalier had been constructively dismissed.  Active Tire could not just lay him off with no notice after 33 years.  However, the main issue was whether Mr. Chevalier should have been required to return to work in these circumstances.  He argued that Active Tire had tried to “make his life miserable” in the period leading up to his dismissal and he therefore would have had to return to work in an atmosphere of “hostility, embarrassment or humiliation.”

After reviewing the evidence, the Court rejected Mr. Chevalier’s claims.  It held that a “reasonable person” would have returned to work in all of the circumstances.  Mr. Chevalier was not able to demonstrate to the Court that his workplace had become intolerable and he was therefore required to return.

If Active Tire had not called Mr. Chevalier back to work, the Court ruled that he would have been entitled to 16 months’ compensation – the time period it took Mr. Chevalier to find new employment.  However, the result in this case was that he was not entitled to anything and was required to pay legal fees to Active Tire, as well as his own.

This case is an example of the risky nature of wrongful dismissal litigation.  It illustrates the importance of obtaining proper legal advice and following it.  Under current Canadian case law, employees who are dismissed or laid off off must seriously consider an employer’s offer to return to work, if it is an offer made in good faith.  Important points to consider may be:

  • Is the offer to return an offer for the same position that the employee held?
  • Will the pay and working condition remain the same?
  • Is there significant evidence of conduct that is embarrassing or humiliating?
  • Does the employee have other employment possibilities?

Dismissed employees should carefully review all of these issues, as well as other related matters, with competent employment law counsel.  Making the wrong decision can be costly and harsh.

No Mitigation Requirement If Employment Agreement Specifies Notice Period

If an employee has a valid, enforceable employment agreement, with a specific severance term – does the employer still have to pay the whole amount even if the employee finds work quickly?

This questions was answered recently by the Ontario Court of Appeal in the case of Bowes v. Goss Power Products Ltd., a decision issues on June 21, 2012.

Peter Bowes had a written employment agreement with his employer.  The contract stated that he would receive six months’ notice or pay in lieu of notice if his employment was terminated without cause “prior to the completion of forty-eight (48) months from commencement.”  The contract said nothing about mitigation or about timing of the payment.

Mr. Bowes was dismissed without cause and he was able to find new employment after only two weeks.  His employer paid him out three weeks’ notice as required under the Ontario Employment Standards Act, but then refused to pay out the rest of the amount specified in the employment agreement.  Mr. Bowes was forced to file a lawsuit.  He was unsuccessful initially and then appealed his case to the Ontario Court of Appeal.

The Court of Appeal reviewed the case law dealing with mitigation of damages in these circumstances.  It emphasized that an employer and employee can fix an enforceable notice period which provides some certainty to both parties.  It may well be a lower amount than the employee would have otherwise been entitled to receive under common law.  However, by doing so, the employer gives up the right to the benefit of mitigation if the employee successfully mitigates damages.

In particular, the Court of Appeal stated the following, quite emphatically:

1.  “A fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice.” and

2.  Payment in lieu of a fixed term of notice, being liquidated damages or a contractual amount is not subject to a duty to mitigate;

The Court of Appeal stated that it is unfair of an employer to draft an employment agreement with a set severance term, that is less than the employee might have had under the common law, and then try to get out of it at the point of dismissal by informing the employee “that future earnings will be deducted from the fixed amount.”

The Court decision, written by Chief Justice Winkler, on behalf of a unanimous Court of Appeal, concludes:

“Where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.”

In the present case, Mr. Bowes was awarded the full six months’ pay, as specified in employment contract, despite the fact that he found other work quickly.

This is a very important decision for Ontario employees as it clarifies an area in which there had been mixed case law.  The Ontario Court of Appeal has stated very clearly that employers must pay out fixed contractual severance amounts, even if the dismissed employee finds new employment quickly – unless the employment agreement very clearly states otherwise.

Employers can still use contracts that include mitigation provisions but these provisions must be included in the original employment agreement and must meet all of the other normal conditions of enforceability.


Long Service Employee Gets 26 Months in Wrongful Dismissal Suit

In a recent Ontario Superior Court decision, Hussain v. Suzuki Canada Ltd.,  a long service employee was awarded 26 months’ compensation as damages for wrongful dismissal.

The dismissed employee, Syed Hussain, was an assistant warehouse supervisor.  He had worked for the defendant Suzuki Canada for almost 36 years.  This had been his only full time job after immigrating to Canada from India in 1974.  Hussain was almost 65 at the time he was dismissed in February 2011, due to corporate restructuring.

After losing his job, Mr. Hussain took a period of time to get over the shock and to organize his efforts to find new employment.  He then applied to some 27 positions by July 2011, though his efforts were unsuccessful.

Justice Roberts, writing on behalf of the Court, noted that 24 months is usually the high end of  wrongful dismissal awards.  However, the Court held that Mr. Hussain was entitled to 26 months’ compensation due to the particular factors of his situation including his lengthy service, his age and other related factors.  The Court held that Mr. Hussain was entitled to benefits, RRSP contributions, and a discretionary bonus throughout the entire 26 month period.

Even though this wrongful dismissal case was decided only 10 months after Mr. Hussain was dismissed, the Court still awarded Mr. Hussain 25.5 months’ compensation and reduced the total notice period by only 1% for the contingent possibility that Mr. Hussain could find new employment over the remaining 16 months.

Finally, the Court ordered Suzuki Canada to reimburse Mr. Suzuki for almost $20,000 in legal fees.

This decision follows on the heels of the Ontario Court of Appeal decision in Di Tomaso v. Crown Metal Packaging, a case in which a long service mechanic was awarded 22 months’ notice in June 2011.

It is becoming quite evident in Ontario that long service employees are now entitled to notice periods at the higher end of the range, regardless of the type of position that the person held or the salary level that the employee enjoyed.

This trend is good news for Canadian employees, particularly long service employees who are not employeed in upper management positions.  Although for many years, the longest notice periods were usually awarded by courts only to the most senior employees in wrongful dismissal cases, that is now no longer an accurate summary of the law.  Age will still be a relevant consideration.  Employees who are dismissed after 20 years of service but are still in their 40’s may not be awarded the maximum amounts.  But dismissed employees in their 50’s and 60’s with many years of service will now all have a chance to obtain compensation of close to two years’ pay.


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