Canadian employees who are dismissed “without cause” are usually entitled to a reasonable severance package. This may not be the case if the employee signed an enforceable employment contract that contains a termination clause, though sometimes these contracts can be challenged. Most other employees can usually expect severance arrangements based on “reasonable notice.” The actual definition of “wrongful dismissal” in Canada is simply a failure to provide that reasonable severance package. If you signed an employment contract or offer letter when you first started, that is probably one of the first things a lawyer will need to review.
Here are some of the key things to look for as part of a “reasonable” severance package.
Severance Pay or Salary Continuation: It goes without saying that the most important component is usually the severance itself. Employers can choose to pay over time, with or without some kind of claw back (or “mitigation”) clause, or in one or more lump sums. In most cases, this is the most important part of the severance package and in many cases, different components are negotiable. The severance must, at a minimum, include compensation for the relevant provincial employment standards amount. For example, in Ontario, the severance package must provide for notice pay under the Ontario Employment Standards Act and severance pay, if applicable. If you are Federally regulated employee (someone who works in a bank, telecommunications company, tv network etc.,) the Canada Labour Code would apply instead of the provincial legislation. Beyond the employment standards amount, employees can negotiate the length of time, the trigger for mitigation, the payment schedule or other terms. This is all aimed at ensuring that the employee is compensated as required by Ontario common law, which itself, can vary wildly for each employee. This is the area on which appropriate legal advice should generally be obtained. The period of time for which the employee is being compensated is generally called the notice period or severance period.
Bonus: Dismissed employees should usually be compensated for accrued bonus for the current year (if there has usually been an annual bonus), as well as bonus for the severance period. Many employers are quite reluctant to include the prospective bonus as part of the severance package. If the employee has been getting the bonus every year and can show that he or she would have continued to get a bonus if employment had continued over the severance period, the bonus should be payable. There may be wording in the original employment contract that overrides this entitlement, but it is often worth trying. If there is wording in an employment contract or agreement that deals with the bonus, this will be something that needs to be properly assessed and considered. Commissions and Variable Pay: For dismissed employees with fluctuating pay, the test is what the employee would have reasonably earned over the severance period. Of course all accrued amounts are owed to the employee, subject to the terms of the employer compensation plan. Going forward, most dismissed employees should be paid severance on the basis of overall estimated earnings, not just base salary for the entire notice period.
Benefits, RRSP and Pension Contributions: Severance packages should include arrangements that compensate employees for all components of their compensation. Generally, all benefits, including extended health benefits, STD and LTD insurance, RRSP contributions, pension contributions, and other perquisites should be continue during the notice period – or the employee should be compensated for the value of any items that are not being compensated. For example, most insurers will not allow employers to continue LTD insurance plans. Employees should request compensation for the loss of this employment benefit. Many employers will agree to include that compensation in the severance package. Pension losses can be a huge component of a severance package, particularly if the employer had a defined benefit pension plan.
Car or Mileage Allowance: If the employee had the use of a company vehicle, the general rule is that the employee is entitled to be compensated for the personal use component of the vehicle. In other words, if the employee used the vehicle for personal use 30% of the time (and showed that on his or her taxes), employers can be required to provide compensation for this loss during the notice period. Some employers will be more flexible in this area and will either provide employees with the use of a vehicle over the notice period or pay a reasonable estimate of the real costs of the vehicle.
Outplacement or Retraining: Strictly speaking, an employer is not necessarily required to provide outplacement or retraining as part of a severance package. However, an employer can be required to pay for the employee’s reasonable costs of “mitigation” if the employee incurs costs in trying to find other work. As a result, many employers will provide direct outplacement arrangements at their expense. Dismissed employees may be able to negotiate the type of arrangements that are being provided, the organization, location, and value of such services. As well, dismissed employees can often arrange to have an employer pay for some upgrade or retraining courses if that will help the employee find new employment. Though some of this may sound expensive for employers, overall, providing these arrangements may help the employer reduce the time period that it will take the employee to find new work and that might save the employer some money.
References: Employers are not strictly required to provide helpful references though some judges may look at this down the road and award extra damages for an employer’s failure to do, even if the judge does not state that expressly. Employees should ask for a mutually agreeable reference and an agreement that any reference requests will be answered in a manner that is consistent with the reference letter or summary provided.
Legal and/or Accounting Fees: Most employers should be prepared to make some kind of reasonable contribution towards the legal fees of a dismissed employee. Once a lawsuit has been commenced, the employer can be required to make these contributions if the lawsuit had merit. Employers will often try to avoid a lawsuit by including payment for some of the legal fees in a negotiated severance package.
Waiver of Non-Competition Clauses: Some employers may be prepared to waive or modify certain non-competition terms or clauses that were contained in a dismissed employee’s employment contract. This can often be a tricky conversation. It is usually more likely that employers will agree to modify a non-competition clause (that might have been unenforceable anyways) than to modify a non-solicitation clause, that may actually protect the employer’s business. Telling an employer that you would like to go and take their clients’ business is not usually the best way to get a great severance package. But telling an employer that you won’t be able to find any work because of an overly broad non-competition clause may be viewed as reasonable.
Other Perquisites: Employers will sometimes provide for items like health club memberships, personal cell phone costs, professional memberships, private annual physical examinations, employer discounts and other items. These items should be reviewed and considered individually. Employees will also need to weigh the value of pursuing an item that may not be significant in comparison to the other items.
General Damages: Most wrongful dismissal damages are fully taxable as if they were income. The withholding rate may be lower (i.e. 30% if the amount is over $15,000) but at the end of the year, the employee will have to pay tax on the full annual marginal tax rate. An exception is if there is a basis for some of the damages to be paid as “general damages,” which are non-taxable. This, fortunately, is not applicable for most dismissals. I say fortunately because it would be a harsh world indeed if every employer who dismissed someone had also acted in a way that would warrant general damages. Nevertheless, conduct that violates human rights legislation or other “bad faith” conduct can warrant payment of general damages. It is very rare that employers will actually negotiate and pay these damages without an actual lawsuit or human rights complaint but it does sometimes occur.
These are some of the items to look for in a severance package, though entitlements to these items will really depend on the terms of the person’s employment, the length of service, the type of position, the existence of any employment contract or offer letter and a range of other factors. A key factor is the likelihood of the dismissed employee finding new employment since all of these items are only really payable if they are arranged initially, or if the employee is actively looking for work and unsuccessful. Dismissed employees who find new employment quickly may only be entitled to the applicable employment standards minimums.
There is no set formula for exact severance pay calculation. Despite the fact that some lawyers might claim there is a very exact number if you plug a few variables into a “severance pay calculator,” that only produces a rough average, which may not even be statistically significant. In most cases, there is a range, sometimes a fairly wide range. Employees need to consider all of the different aspects of the proposed severance including which items are being paid and which are not, whether the severance is being paid as a continuance or a lump sum, and other related factors.
This list of items is provided only as a guideline for things that employees should consider when looking at a severance package that has been proposed. In most cases, particularly when a number of different items are listed, employees should make the tax-deductible investment of obtaining proper legal advice from a qualified employment lawyer.