Risks and best practices of voluntary separation packages

Recently, major Canadian employers have turned to voluntary separation packages as a cost-cutting measure amid economic challenges.

Companies such as Bell Canada and TELUS have introduced voluntary buyouts for unionized employees, citing reduced workloads and shifts in business strategy. Meanwhile, President Donald Trump offered a now-paused deferred resignation program to tens of thousands of public sector workers.

While voluntary separation programs offer cost savings and reduced litigation risks, they also come with significant legal and operational considerations.

For Canadian employers and HR professionals, careful planning, legal compliance, and clear communication are essential to ensure that voluntary separation remains a mutually beneficial option — rather than a source of future disputes — according to two legal experts who spoke with Canadian HR Reporter.

Reduced litigation risks

From an employer’s perspective, voluntary buyouts offer certainty in cost considerations, especially if employment contracts are involved, according to Christopher Sinal, a partner at Siskinds.

"From an employer standpoint, to say, ‘Alright, we're offering these packages, here is how we're structuring them, and here's how that may look,’ there's a degree of certainty, particularly from a budgeting perspective… that can be attractive to employers."

Voluntary separation packages can also reduce litigation risks associated with traditional layoffs, he says.

"Having a program that is voluntary and attracts those employees who may already be in the head space where they're thinking about potentially a career transition... obviously has benefits from a litigation perspective, because they are going to be unlikely to litigate, because they're the ones who have chosen this."

Ioana Pantis echoed this, noting that voluntary separation plans help companies avoid common law and wrongful dismissal claims that often arise in mass terminations.

"These kinds of programs incentivize employees to accept lower packages than if they had been dismissed without cause,” says the partner at McMillan.

“This is a significant benefit for employers when the upper end of common law and reasonable notice has recently been pushed in Ontario by our courts, from around the 24 months that we used to think of as the informal cap to more recently, 26, 27 and 30 months."

The other benefit for employers is that it helps them avoid individual discrimination and other claims often seen as part of wrongful dismissal litigation, she says, “as well as associated reputational harms and legal fees to defend such claims."

Benefits for employees with buyouts

And for employees, they'd be getting good packages not otherwise owed to them if they just resign, says Pantis.

Sinal agrees: If you have a base of employees who are considering leaving their job, voluntary separation packages offer that opportunity, so people can more easily plan the next stage of their life, he says.

But there’s also a risk for employers with this approach.

“You will find some people that are not happy at work because they don't feel like they're performing adequately. But you also may… have high performers who feel like they're underpaid and undervalued. And so you then potentially risk culling out people that you need.”

A 2021 study conducted by a Canadian academic found evidence that voluntary layoffs may result in the exit of the wrong employees.

Selection criteria for voluntary layoffs

For a voluntary separation program to be effective, it needs to be carefully structured to ensure fairness, compliance and alignment with business goals. Pantis emphasized the importance of setting clear eligibility criteria.

"An employer needs to carefully determine what target group of employees it wishes to capture as part of a voluntary separation program. In other words, what is the employer trying to achieve and what is its reduction target? The eligibility criteria need to be objective and non-discriminatory, such as performance issues or low skills or sales, and not solely based on protected human rights grounds, such as an employee's age."

The eligibility criteria of a target group are often factors such as years of service, age, compensation, position and province, she says.

“It's quite common to see a combination of both age and service, such as when an employee's age plus service equals 75. And there is often a minimum age requirement of 50, 55 or 60.”

But age on its own as an eligibility criteria would be discriminatory, so employers should always avoid that, says Pantis.

Age discrimination considerations

The communication of the program should be given to all employees, even though all employees won't qualify, to avoid a discrimination claim, she says.

“Some employers might think if they just give the option to older employees, that is fine, but that could risk older employees coming back and saying, ‘No, that was discriminatory.’ They felt coerced to accept the program.”

Pantis also warned that poorly structured programs could lead to human rights violations.

"It's also important that if an older employee does not accept a voluntary separation or retirement, but is then selected for termination soon after, and the reason is even 1% related to their age, that could be a serious human rights risk.

“So if an employee refuses and is older, the employer should generally avoid terminating their employment soon after.”

It’s also important to note that the Ontario Human Rights Commission has stated that making an early retirement incentive available to older employees is not discriminatory, but if the employer puts pressure on those older employees to accept a separation package or makes it mandatory, that would be discriminatory, she says.

“They say on their website: ‘As early retirement schemes, by definition, target older workers, great care must be employed and using them as a means to achieve downsizing objectives.'”

Voluntary process key to employee buyouts

Voluntary separation programs can carry the risk of coercion, agrees Sinal, who stressed that companies must ensure the process is voluntary and transparent.

"You don't want to be seen as forcing this on anyone. This is something where it's made available to employees… they are the active party here, right? And we're doing that because, of course, we don't necessarily want to trigger any termination or severance obligations from the employer perspective, unless we're doing that consciously and deliberately,” he says.

"You certainly do not want to sit down and say, ‘Hey Jim, hey Pam, don't you think it's time you started thinking about retiring?’ That is not something that we want to do. Generally, you want these types of packages to be broad-based and not specifically targeted to any individual or group."

Employee morale and knowledge transfer

Another risk HR professionals must consider is the impact on company culture — particularly for employees who remain. Sinal noted that voluntary departures can prevent forced layoffs later on, which helps maintain morale.

"For those employees who are left, it makes it less likely that they're going to be subject to head count reductions... so, from an employer perspective, there's a benefit to that as well in terms of employee morale and attitude."

However, losing too many senior employees at once can create operational challenges, he says.

"Sometimes, when we do these packages, that's a consideration, and there may be features that are baked into it in terms of succession planning and ensuring that there's an appropriate knowledge transfer."

The employer should test its eligibility criteria to ensure it doesn't capture a larger number of employees than intended, says Pantis, “otherwise there could be negative business impact with too many employees leaving, or the cost being too high,” she says, citing as an example key senior employees who are important for operations, with no succession plan in place for their role.

Pantis agrees that the organization should figure out “a succession plan to preserve institutional knowledge or client relationships for the employees that will voluntarily separate — this is not really a legal consideration, but a practical business one.”