Best practices for severance pay

Once lauded as a major Canadian success story, Shopify was in the new recently for less than savoury reasons.

The e-commerce company is alleged to have offered severance packages to roughly 2,000 employees, who then accepted the offer under deadline – only to have the company change the offers.

For many people, this reduction was to the tune of tens of thousands of dollars, according to Lior Samfiru, national co-managing partner at Samfiru Tumarkin in Toronto, which has launched a class action against Shopify asking for $80 million in damages and a further $50 million in punitive, aggravated and exemplary damages.

“From our perspective, that is a simple breach of contract. Once a severance offer is accepted, it's binding on both sides. Just like the employee could not then say, ‘I changed my mind, I want more,’ the employer can’t say, ‘Well, no, we're not going to pay it.’”

In early May, Shopify said it would cut an estimated 2,300 positions of 11,600 employees. The company has not yet responded to a request for comments about severance.

Misconceptions, lack of awareness about severance pay

A vast majority of terminations of employment go amicably, and it is very unusual for either side to have an agreed offer, or even just an offer available to be accepted, and then to change it or revoke it, says Danny Bernstein, partner at Roper Greyell in Vancouver.

If a case involving severance ends up in court, it’s usually because an employer thinks they have cause to dismiss the employee, in which case no severance is ongoing, and no notice was provided — which is quite often “contentious,” he says.

If there is no cause, then the argument is generally about what was an appropriate notice period and what should be included in terms of compensation, such as bonus plans, incentive compensation or rolling commissions.

“It gets to court when an employee and an employer can't agree on what that looks like,” says Bernstein.

Entitlements: Employment standards versus common law

So, what are the basic rules when it comes to severance pay? For one, it involves both statutory minimums and common law entitlements.

In Ontario, for example, the Employment Standards Act outlines the minimum amount of compensation that an employee gets on termination, and these vary depending on the size of the company and the person’s length of service.

But your full entitlements are not dependent on that, says Samfiru.

“Every employee gets their severance under common law, sometimes referred to as notice under common law, based on their age, their position and the length of their employment… under common law, you could easily be owed six months’ severance even though you only worked for two years,” he says.

“And I will honestly say that some employers also get confused by that — I've had employers telling me over the years, ‘Oh, no, no, you're confused Mr. Samfiru, this person has only worked for us for two years, they don't get severance.’ And that's wrong. … We see both employees and employers getting this wrong all the time.”

There's no doubt some employers need educating about the difference between statutory notice and common law, and the differences by province or territory, says Bernstein.

“In Ontario, you've got termination pay and severance pay, whereas that's not a statutory thing in other provinces. And then, in Ontario, you've got to continue benefits, whereas you don't elsewhere. So, definitely, some education is required.

“But the majority of our clients as employers are well aware of their obligations. And we really don't have to do a whole lot of educating. And, if anything, I think the pandemic has accelerated employee awareness.”

How employment agreements can help

Another key point to consider when it comes to severance pay is the existence of employment agreements.

With a properly drafted contract, employers can limit their employees to the statutory minimum, says Bernstein.

“Or you can create a formula that defines what their entitlement is. And it may not be the statutory minimum, but it may be less than common law. And so that is complete protection,” he says.

“You don't need anything else, you don't need a release, you don't need to pay them more severance, there's no common law, because you've used your contract to contract out all reasonable notice.”

Even if you don't want to limit someone to the statutory minimums, the agreement can “create certainty” so that at the end of employment, you're not negotiating with the employee, says Bernstein, “and you're not wondering what your liability is — it's defined.”

However, often those employment agreements are unenforceable, says Samfiru, “and the reason for that is our courts have established a very strict and specific criteria that has to be included in that contract in order to limit someone's severance.”

“They would have to say certain things in a certain sequence, and if they don't do it that way, then they don't effectively limit severance. So in many cases, even if an employee has signed an agreement that tries to limit their entitlements, it does not actually have that effect… That's why neither employer nor employee should assume that they have an enforceable termination term in their agreement. They have to get some legal advice.”

While Bernstein says he gets demand letters all the time saying a contract is invalid and non-binding, “it is very possible and doable with proper drafting. So that's the best protection for a company if they want to avoid having significant common law notice obligations to just define it at the outset.”

And it’s also worth mentioning that a release for an employer is very valuable, he says.

“Even if they feel like they have complied with the contract and the statutory notice requirements, it is valuable to have a release to avoid any future claims… Let's say [an employer] provides the employee with a few additional weeks of notice or severance, they can get a release in exchange for that, which can protect them.”

Which is better, lump sum or continuous payments?

Another important factor in calculating severance is the manner of payment: employers can provide working notice, salary and benefit continuance or a lump sum.

These days, lump sums are the most common, according to Bernstein.

“I do see situations where there's an offer of a lump sum, which is slightly discounted, compared to an option of continuance with a callback. So you might say, ‘We'll give you, for example, six months of the lump sum or nine months of salary continuance.’ So there's the benefit of a lump sum, but it comes at a bit of a discount, because maybe the employee finds a job within that period of time.”

It’s more a question of cash flow for the employer and whether they're confident the employee is going to find alternate employment, he says, adding that employees seem to prefer lump sums because there's a clean break and they don't have to deal with the employer anymore.

On the whole, most severance packages end up being a lump sum payment, because there's certainty for both the employer and employee as to what gets paid and how it gets paid, says Samfiru.

“Usually, if an employer offers… salary continuance, they would also add a condition that says that if the employee finds another job while they're still getting paid, they'll only get a percentage of what's outstanding,” he says, referring to a clawback.

“And they're allowed to do that generally. Because if an employee is able to find another position, that could limit their entitlements. And there's nothing wrong with that… so long as the severance offer is otherwise adequate.”

What is an appropriate deadline for accepting the offer?

Once the format and numbers have been worked out, HR will extend the offer to the departing employee. Often, this comes with some kind of deadline to encourage signoff.

But employers should be careful here.

“You don't want to have an employee feel like they've got a lot of pressure to sign a settlement or a release when you've just heard terminated their employment. So we always advise our clients to give them a reasonable amount of time,” says Bernstein.

Roughly five business days should be sufficient time for the individual to go and speak to their partner or their family, to consult with a lawyer if they need to, and think about it, he says.

“More than that, I don't think you need because on the other side, employers want certainty. And they want to know how the situation is going to end. And they also have statutory deadlines for paying out termination, vacation pay, and those things and don't want to let it drag on too long.”

Even if an employee is prepared to sign right away, it’s not a bad idea to suggest they go and get a cup of coffee and come back later, just so they’re sure, says Bernstein.

“If they still want to sign, then they can sign in, but it's not good to have them sign on the spot.”

Certainly, there's an expectation of a timely response — it is in everyone's interest to be able to resolve this matter and move on, says Samfiru.

“But I think there's a problem when that deadline is used as a pressure tactic.”

“That is a problem, especially recognizing a couple of things: Number one is that an employee, in fact, does not lose rights for two years, so imposing a deadline of ‘Friday by five’ is arbitrary and it's unfair, especially to someone that just lost your job.

“And second, I would suggest to you that a deadline should only be put in place if an employer offers an employee a better severance than what the employer is required to offer them.”

For example, the employer is only required to pay six months’ severance but offers eight months if the employee accepts by Friday, he says.

“The problem here is that, in many cases, an employee offers a severance package with a deadline, and still offers less money than what they owe the individual… an employee may not know or appreciate that they're owed more than what they've been offered. And what that pressure tactic, they end up accepting that inadequate severance package.”