Sears provides lessons for HR

Still not managing to ring up much-needed sales, Sears announced in June it was seeking creditor protection and would be closing 59 stores in Canada and laying off about 2,900 workers at retail and corporate locations.

The news was not entirely surprising considering the retailer’s economic challenges of late, but the chain still faced a backlash when it became apparent departing employees would not be receiving severance payments.

Sears also announced it would no longer be making special payments to the defined benefit pension plan, post-retirement health and dental benefits, and post-retirement life insurance premiums.

On top of that, Sears announced it would be doling out retention bonuses totalling $9.2 million to entice key staff to stay with the company during the restructuring.

And while the company later announced a “hardship fund” of $500,000 would be offered to particularly hard-hit workers, the public relations (PR) damage had been done — providing lessons for other employers that may face the same fate.

“It’s so difficult — you have to balance the interests of employees with the interests of economic growth and the potential the employer could turn things around. And, of course, the employer is at the mercy of employees if they decide to leave in advance,” said Jennifer Heath, a partner at law firm Rubin Thomlinson in Toronto.

Other companies that have to go through this process should be mindful of the fact they’ll be working with lawyers and the court on how to deal with ongoing payments, so they don’t have “a PR nightmare” where it looks like employees are being treated poorly and the public sees them as “a villain,” she said.

Severance and bonus payments

When a company goes into bankruptcy protection, all the secured creditors are paid out first. Employees aren’t counted as secure creditors, so they’re last on the list — if there’s anything left in the pool, according to Chantel Goldsmith, a partner in the labour and employment group at Samfiru Tumarkin in Toronto.

It’s also really common to offer retention bonuses when filing for bankruptcy protection or in an insolvency position, to keep key employees onboard, she said.

“The optics of that look horrible to these poor other employees, long-term employees who are getting nothing. So (Sears) could have done some PR better in terms of how that came across to these employees, just to give them a better understanding of why Sears was doing what they were doing.”

Employees just don’t understand — they think they were the ones working hard so they should be protected at all costs, said Heath.

“The law just simply hasn’t caught up to that yet or isn’t going to catch up because there’s a bigger interest that’s involved and the legislation recognizes that for companies looking to reinvent themselves, like Sears is apparently going to do, they need to have other employees that continue to work, they have to have money to run the business, so that means the company itself needs to be protected from creditors, including those employees who are entitled to severance payments.”

Retention bonuses are common when a company is up for sale or in trouble, especially at a large company with many employees, she said.

“It’s very difficult for them to keep track of and keep an eye on ‘Is this person going for an interview?’ ‘Is this person dissatisfied on a day-to-day basis?’ So they really just use a broad stroke approach. And in this instance, there’s a retention bonus piece tied to staying with the organization for six months — it’s not as though they’re going for years because I think there’s recognition that if anything happens, it’s going to be sooner than later.”

Twenty-five per cent of the bonus is tied to the success of the company, so part of their bonus is dependent on staff both as individuals and as a collective group in doing their best to make sure Sears is an ongoing concern, said Heath.

But in comparing the millions set aside for retention bonuses with the lack of severance payments for laid-off workers, “there’s just such a disparity between the two, so that was going to be a PR nightmare from the beginning because people say, ‘There is money, you’re just choosing to allocate it to these other people,’” she said.

It’s a competition among secured and unsecured creditors, and employees rank last when they should rank early, said Richard Leblanc, an associate professor in governance, law and ethics at York University in Toronto.

“Why should an unsecured creditor — that knowingly gives goods and services to a distressed company — rank ahead of an employee?”

The outcry from employees and the public is understandable, he said.

“We need to change our bankruptcy laws so for employees in a distressed situation, there continues to be carve-outs,” said Leblanc. “And (Sears’ creditor protection) didn’t happen overnight. This is a slow-moving train wreck that has taken five to 10 years, especially when you see the inequity of senior executives having incentive bonuses and employees not receiving severance. So I think our bank laws need to change to have employees be higher up the food chain so their welfare is provided for, especially if you’ve worked at a company for 10, 15, 25 years — you want a pension and adequate severance.”

“This is only going to continue, it’s only going to get worse, so there will be more Canadian retail failures in Canada, and it’s really important that politicians in Ottawa — because bankruptcy is federal — really compel companies to provide for employees. That’s just crucial.”

Hardship fund

Sears of course tried to rectify the situation somewhat by announcing it would offer a hardship fund.

The fund means employees now have to apply and, “for lack of a better term, beg for their supper,” said Heath.

This almost seems like the company is creating three classes, with some employees receiving bonus payments, some receiving money under the hardship fund and some receiving nothing from either fund, she said.

“There may be some sour grapes from that.”

And while the hardship fund came out of the money set aside for the bonuses, said Heath, “it’s such a small fraction and, given the value of the hardship fund and how many employees would otherwise have access to it, it’s not going to lead to a big change for any of those employees.”

It’s nowhere near what the common law entitlements would have been, said Goldsmith.

“I mean, any money is better than no money, but I don’t think it will go very far for people who have been long-term employees.”

A long-term retail worker, for example, could be due two to three weeks per year of service, she said, adding up to a year’s worth of severance.

Like Bombardier when it deferred executive bonuses after considerable backlash in 2017, the hardship fund was done after the fact, said Leblanc, and it adds up to a modest amount for each employee.

“The hardship fund is crumbs on the table, it’s not the slice of pie the employees deserve; it’s too little too late and the damage has been done,” he said.

“They shouldn’t have had a misstep to begin with, and that starts with the board. The board has approved these bonuses, so you really need independent directors on the Sears board to say, ‘No, we are not doing it, we need to provide for employees.’”

In contrast, Target Canada set up a $70-million trust for employees when it left Canada, and that’s a better example of how to operate, said Leblanc.

“You really need to be concerned with your reputation on an ongoing basis, and now consumers and stakeholders are very sophisticated when they see the employees are getting the short end of the stick, so it should be voluntary… this is just common sense.”

However, Target had more assets and it had an American parent company that could arguably fund all of this, said Heath.

“There was probably a recognition too that the courts were going to come down harder on an American company that comes in for a short time, buys assets… and took over this business, and then made so many mistakes in a short period of time and left people hanging,” she said.

“I think the American parent company knew they were eventually going to be on the hook so it was better to pay the price early and deal with all of that, rather than have more money come out later on.”

On the other hand, it would have been better if Sears had allocated some kind of fund for employees, and said for the next few weeks, people would still be paid, according to Heath.

“(It’s about) recognizing from the outset that if you are going to undergo CCAA (Companies’ Creditors Arrangements Act) protection, you as an employer lose a bit of control because of course it’s the monitor and lawyers who will oversee and say who gets to spend your money,” she said.

“When you file for protection, you’re to some extent putting your hands up and somebody else has to make the decisions.”

Communication essential

Target was also very good when it came to sending out the same message to all employees, said Heath. That’s because when people have been let go, they have got more time to reflect on and speak with others about the situation, “so gossip goes like wildfire,” she said.

“It is really important for there to be a clear communication and a resource for these employees because it’s a very difficult situation, and they can be waiting a long time.”

An employer going through this kind of ordeal really needs to come up with a central message that has everybody saying the same thing, said Goldsmith.

“You don’t want people to start coming up with their own message… or to leave anybody in the dark.”

There needs to be a consistent message, along with accountability and tone at the top, said Leblanc.

And the communication should never be by email but instead be face-to-face — with honesty, he said. If not, the best employees may leave because they don’t trust management and the shifting messages.

“You need to have a town hall, you need to give employees the communication they need, you need to say what you mean, mean what you say, don’t deviate,” said Leblanc.

“During a time of financial distress, you cannot over-communicate; it’s really, really important to communicate. The worst thing is you have mixed messages.”