Employer and employee interpreted severance clause in employment contract differently
This instalment of You Make the Call features a dispute over whether an employment contract’s termination clause allowed severance pay in addition to working notice.
Lan Shangguan was hired to be the vice-president of finance for IBB International, a Vancouver-based jewelry wholesaler, in March 2007. In April 2008, Shangguan was promoted to the position of chief financial officer. As part of the promotion, an employment contract was drawn up that included a clause that stipulated IBB and its parent company, Allura International, had to give a minimum of 30 days’ notice, or pay in lieu of notice, for termination without cause. This clause was subject to another clause for severance pay, which was to be one month’s pay for each year of service, to a maximum of 12 months, and would be the “full and final settlement” of all Shangguan’s claims related to the termination.
On May 4, 2009, Allura gave Shangguan notice that her employment would be terminated in three months. IBB adjusted this the next day to four months in accordance with the contract, which it calculated as 30 days’ notice plus three months’ severance. Shangguan worked through the notice period in order to use up her holidays and shortly before she left on Sept. 4, she informed Allura she expected to receive severance pay at the end of her working notice period.
Allura disputed her claim, arguing the four months’ notice included the equivalent of three months’ severance pay for her years of service. The contract gave it the choice of giving her notice or paying her in lieu and because they gave her four full months of notice, severance pay was included in the package, the company said. Allura also argued it didn’t make sense and would place a hardship on it if it provided full severance pay in addition to four months’ notice.
You Make the Call
Was Shangguan entitled to severance pay on top of her notice?
Was the severance pay included in the four months’ notice?
If you said Shangguan was entitled to receive severance pay on top of her working notice, you’re right. The British Columbia Supreme Court found that while the notice clause expressly provided for the employer’s choice of a minimum of 30 days’ notice or pay in lieu, the severance pay option did not. In addition, the notice clause set a minimum for notice but implied it could be longer.
The court noted Allura’s right to terminate Shangguan’s employment with a minimum of 30 days’ notice was subject to the severance pay clause, which required payment based on years of service. However, the court found the language of the contract was not ambiguous and nowhere stated, as Allura argued, that Allura had the option of providing nothing but working notice in order to forgo severance pay.
The court found the severance pay clause had three limitations: a maximum of 12 months’ salary; pay in lieu of notice would be included in it if there was no working notice; and the payments would be reduced if the employee found work during the period of payments. However, Allura was arguing for another limitation that wasn’t there: a reduction of the payment equal to any salary paid during a working notice period.
While Allura argued Shangguan knew it misunderstood the contract and should have said something, the court found the company had sufficient legal advice and the employee shouldn’t have been expected to raise the matter. Even if she had, the court said, it was unlikely Allura would have changed its view.
“Avoiding any payment to (Shangguan) beyond her salary was an option the employer did not have under the contract it had entered into,” said the court. “Allura’s right to terminate on 30 days’ notice or pay in lieu is subject to clause 9.3, which also requires the employer to pay severance.”
The court ordered Allura to pay Shangguan $36,000 in severance pay.
For more information see:
•Shangguan v. Allura International Inc., 2010 CarswellBC 1837 (B.C. S.C.).