Can employee demand lump-sum severance? (Toughest HR Question)

Public or private sector, jurisdiction, terms of employment contract must be taken into account
By Colin Gibson
|Canadian HR Reporter|Last Updated: 07/14/2013

Question: An employee from our company has been offered a severance package with continuation of her salary for a specified period. However, the employee has made a formal request to receive her severance in a lump-sum payment. Are we required to comply with this request or can an employer decide how to structure the package?

Answer: The answer to that question depends on a variety of factors such as jurisdiction, whether the employment contract defines the severance package and whether the employer is in the public or private sector.

Employment standards statutes across Canada are generally uniform in their approach to severance payments made in lieu of statutory notice of termination — such payments must be provided in a lump sum.

Under the Employment Standards Act, 2000, in Ontario, where an employer pays severance instead of giving working notice, the employer must also pay the employee the applicable benefit premiums over the statutory notice period.

At common law, there is a presumption that wrongful dismissal damages are to be awarded in a lump sum. In Tull v. Norske Skog Canada Ltd., the Supreme Court of British Columbia ruled it may endorse an employer-imposed salary continuance severance package as a proper means of paying wrongful dismissal damages — but only if the length of the salary continuance is equivalent to the period of notice the court finds to be reasonable, and only if the employer has continued the employee’s benefits over the period.

Courts in other provinces have been less willing to adopt this approach. For example, in Ontario, courts have held they are restricted to making a lump-sum award of wrongful dismissal damages.

In Russo v. Kerr Bros Ltd. in Ontario, the court found this approach to be consistent with the Courts of Justice Act, which provides for periodic payments only in the case of a personal injury or family law decision.

The court found the legislature’s decision to exclude periodic payments in other circumstances suggested judges lack the power to make such an award.

Despite the presumption in favour of lump-sum payments, employers should pay close attention to any governing statutes that may provide otherwise.

In British Columbia, for example, the Employment Termination Standards regulation established under the Public Sector Employers Act states that in the public sector, severance must be in the form of periodic payments unless the employer, at its discretion, considers a lump sum to be more appropriate.

An employer and an employee can agree to displace the common law presumption of a lump-sum severance payment by entering into an employment contract that expressly provides for severance in the form of salary continuance.

But care must be taken in drafting termination clauses of this nature to ensure they meet or exceed the employee’s rights under employment standards legislation.

For more information see:

Tull v. Norske Skog Canada Ltd., 2004 CarswellBC 1860 (B.C. S.C.).

Russo v. Kerr Bros Ltd., 2010 CarswellOnt 8373 (Ont. S.C.J.).

Colin G.M. Gibson is a partner at Harris and Company in Vancouver. He can be reached at (604) 891-2212 or cgibson@harrisco.com.

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