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Reading the fine print

A termination clause can dramatically reduce a person's entitlement to notice/severance
Employment law

By Stuart Rudner

Imagine the scene: One day, just like any other, you're sitting at your desk planning to pack up and head home soon when you are unexpectedly called into a meeting in the boardroom. You enter the boardroom to find your manager and the head of HR sitting around the table. You've been around long enough to know what's happening, and your head starts to spin as you realize your life is about to change dramatically.

You barely hear them explain that the company is downsizing and your position has been eliminated. The only thing that keeps you somewhat calm is the understanding that since you have been with this company for more than 15 years, you will receive a fairly substantial severance package. After all, you're now in your mid-50s and have a relatively senior position. You’ve seen what other people have received when they have been downsized.

They hand you an envelope and encourage you to review the offer carefully and seek legal advice. You decline their offer of a taxi ride home, and head out to your car. At that point, curiosity gets the best of you, and as you settle into the car, you open the envelope and take out the severance offer. Getting to the important parts, your heart stops when you realize that all they are offering you is eight weeks of salary and benefits. Throwing the document on the floor, you grab your cellphone and look up the contact information of that employment lawyer that you have been following online for a few years now "in case you need him one day." You call their office and schedule a consultation for later in the week.

As the employment lawyer requested, you send in some background information and documents, and then simmer over the next two days, waiting for your appointment, when you will be told how much you are really entitled to.

Imagine your further shock when this experienced employment lawyer tells you that 15 years ago, when you joined the company, you appear to have signed away many of your legal rights to severance, and unless you can find a way around the contract you signed, eight weeks may be the extent of your entitlement.

As regular readers will know, the common law provides that employees are entitled to "reasonable notice" of the termination of their employment unless there is just cause for dismissal. However, that entitlement can be displaced by contract. It continues to amaze me and my colleagues that many people, including sophisticated individuals such as lawyers, senior executives, and even HR professionals, sign employment agreements that dramatically limit the rights severance, while, in many cases, also restricting their post-employment activities through non-solicitation covenants.

I understand that in some circumstances, people are just happy to find a job. However, in many cases, the individual may well have been in a position to negotiate the agreement, but did not take the time to review it and consider its implications before signing. Often, when I politely ask if the individual remembers signing an employment agreement when she was hired, her answer makes it perfectly clear she did not pay much attention to it. Or, in some cases, they advise me that they were aware of the termination clause, but did not think that the company would really enforce it.

A termination clause can dramatically reduce your entitlement to notice/severance. Pursuant to the common law, the historical but unofficial cap severance has been 24 months. Recently, we have seen a few cases break through this barrier. A termination can limit you to the statutory minimum. By way of example, a senior manager in his mid-50s with 15 years of service may well receive 15 or more months of severance pursuant to common law, but a harsh termination clause could limit him to eight weeks. Obviously, this is a tremendous amount to give up without much thought.

In a consultation, once we determine that there is a termination clause in place, we will review the circumstances surrounding the execution of the contract, and the wording of the termination clause itself, in order to assess whether it is possible to get around it. In recent years, and as I have written about on several occasions (see here, here, and here), there have been many court challenges in which individuals sought to have termination clause found to be unenforceable. In several cases, they have succeeded. However, there are many more situations where individuals agreed to termination clause that limited their rights and were bound by them.

While it may be possible to avoid the consequences of a termination clause, individuals should never assume that what they sign will not be enforceable, or that the company will not hold them to it. We have seen many situations where dismissed employees have received minimal severance pay as a result of contract they signed with barely a thought. When they lose their job, they are devastated. While I understand that in some cases, people may be desperate to find employment, everyone should review job offers carefully. Often, we can help our clients negotiate better terms. Of course, this will depend upon who has the negotiating power. However, at the very least, they will go into the relationship with their eyes open, knowing what their rights are.

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Stuart Rudner

Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw. He can be reached at srudner@rudnermacdonald.com.
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