Employment terminations can be straightforward, or they can be complicated, but they are ultimately something of a chess game. The one move that remains in your control, though, is the exit package.
We’ve previously written about times when you may not owe an employee anything, but what about the money that you do owe them, and how should it be paid out to avoid potential litigation and let everyone walk away satisfied?
Where Law Meets Contracts
The first guide to what you may owe an employee upon termination comes from their employment contract. If you have a written employment contract that was written by a lawyer or HR professional, it likely (but not always) spells out what you owe an employee upon termination. This may be the minimum under the Employment Standards Act, or it may include some additional amount.
A word of warning about the former: if the contract does attempt to limit you as the employer to only paying an employee’s legal minimums, it must be written with extreme precision. Courts have invalidated countless contracts which do not, in exact words, specify everything that the employee may be owed as part of their legal minimums. For example, if it notes termination pay and benefits but excludes any mention of severance, a court challenge could rule that the contract is legally null and void.
What if there is no written contract, or the contract that is in place says nothing about what an employee may be owed upon termination? In that case, an employee may be legally eligible for common law notice. This is based on a theoretical judge’s estimate of how long it may take the employee to find comparable work, considering, inter alia, their age, years of experience with their employer, their seniority, and the nature of the work they were doing.
This amount can become quite extensive if left uncontested. If the employee did pursue a legal claim, depending on their seniority, a judge could order upwards of 24 months’ pay in lieu of notice or even more, given certain circumstances. That is precisely why written contracts are in place; they are meant to prevent that sort of wildcard scenario.
But how should employers structure an offer that will be attractive enough for employees not to want to sue?
A Fair Approach
Even if a contract stipulates an amount, most employers recognize that there may be
benefits to going above and beyond what they had previously agreed to. Perhaps the
employer has not updated their contracts in some time and is not confident that they could withstand legal scrutiny. Or, sometimes, the employer feels bad about the situation and wants
to ensure that the employee lands safely on their feet.
No matter the reason, many employers will opt to reach that sweet spot in their
severance package offer. The employee may still be disappointed, but the amount offered is
enough to disincentivize them from pursuing legal action. They may still want time to think it
over (and should never be made to sign under pressure!), but ultimately realize that accepting
the deal will save them headaches in other places.
These amounts can be paid out in two key ways, and each has its benefits and
drawbacks. Employers may offer to pay the amount out as a lump sum, in an amount
representing salary over a given period. This may help bring the matter to a speedy close and
give both the employer and employee peace of mind. However, there may be unwanted tax
implications for the employee, so they may be cautious.
Also, while employers are obliged to compensate employees fairly, employees are, in
most cases, legally obligated to seek new employment. A lump sum can effectively remove
that obligation, as an employee who finds new work quickly has effectively received a
windfall. However, employers can avoid that windfall by instead keeping the employee on a
‘salary continuance.’
In a salary continuance, the employee effectively continues to earn their salary at
normal pay periods for that same amount of time, even though they are not required to report
for work. Their obligation to find comparable work, however, remains. Employers can have
better control in these situations by stipulating that an employee must inform them within 5
days of securing new employment.
If that is the case, employers can put a ‘clawback’ into their offer. In most cases, this
means that should the employee become re-employed, they will only receive a portion
(usually half) of whatever amount is owing, paid as a lump sum. If there were two months
left of pay but they have found new employment, they would then earn one month as a lump
sum payment and the transaction would be complete.
Please Release Me
Why would an employer consider offering an amount above and beyond their legal or contractual obligations? The answer is simple, and it’s usually not about kindness. If an employer offers extra, that can be seen as consideration in exchange for a Full and Final Release.
A Full and Final Release is a document that can be prepared and included with an exit package which an employee is required to sign if they wish to receive any additional money beyond what they are owed. In exchange for those added funds, they are fully and completely releasing the employer from any potential legal claims related to their employment, or their termination.
The Release acts as what is known in law as an ‘estoppel.’ If an employee does try to break the Release and make a claim later, the employer can use that Release to stop the claim in its tracks. It can also contain other clauses, such as ensuring the employee keeps any information about the settlement confidential and does not disparage the employer or their reputation at any time.
Final Thoughts
Employers should be mindful when it comes to termination strategy. An employee may not take the news well despite the best preparations, but there are steps that employers can take to soften both the emotional blow for the employees and the legal blowback for themselves.
Along with routinely updating your employment contracts, consult an employment lawyer about how to best structure your exit packages. We can help you look at all possible scenarios and make the moves that treat employees fairly but are also best for your business.
Contact us today to set up a consultation.
