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Severance settlements protect employers, employees

They can help with jettisoning a worker but can also be hard to change later

By Jeffrey R. Smith

When problems arise between employers and employees — whether caused by employee misconduct or employer bad-faith conduct — there are different ways to deal with it. In many cases, employers would like to dismiss the employee and be done with it, but that can be quite a hassle.

If there isn’t just cause, an employer is on the hook for providing reasonable notice or pay in lieu of notice — the latter being more likely and also more costly.

If the employer wants to assert just cause, then it has to go about compiling evidence justifying the dismissal — which can be a high bar indeed. If some sort of severance pay is offered, it’s usually a good idea for employers to have the employee sign a settlement or waiver in order to receive the severance.

If the two sides don’t want to end the employment relationship, then some form of discipline (in the instance of employee misconduct) could be meted out, or a settlement can be negotiated, often with the understanding that any further similar misconduct will result in dismissal — a last-chance agreement.

When it comes to a severance settlement, the idea is generally that the employee releases the employer from any further claims in relation to the termination, in exchange for a monetary severance package paid by the employer.

Occasionally an employee changes her mind and tries to sue for more termination pay — a common argument in such circumstances is the employee signed a settlement agreement under duress — so it’s always important to allow the employee to have a chance to review the settlement agreement and seek legal advice. But, usually, once a settlement agreement is signed, it’s a done deal.

However, sometimes the employer may change its mind about a settlement agreement. Three years ago, an Ontario company dismissed an employee with 13 years of service without cause. It reached a severance settlement agreement with the employee which both sides signed.

After the settlement, the company learned of missing funds the former employee had taken from co-workers for discount tickets to a theme park. She had collected the money and spent some of it with the intention of paying it back before it was due to the park. However, she was found out and charged with fraud and breach of trust. The charges were later dropped.

The company investigated and informed the former employee it would no longer honour the settlement agreement, since it now had after-the-fact cause for dismissal. A court disagreed, finding the money wasn’t the company’s, she intended to pay it back and, perhaps most important, the employee didn’t induce the company into making the settlement; it was the employer’s idea to protect itself.

Severance settlements are meant to provide security and stability to a severance process. They can protect employers from further legal liability and establish known costs for which the employer can plan by preventing future action by the employee but, on the flip side, they do the same for employees.

They can help an employer jettison an employee it would rather be done with, but what comes with the territory is that the employer usually can’t come back later and change it either.

© Copyright Canadian HR Reporter, Thomson Reuters Canada Limited. All rights reserved.

Jeffrey R. Smith

Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.
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