Too often, employers assume severance costs are limited by a termination clause and then spend thousands of dollars in litigation, only to find out they’re wrong
In the context of HR and HR law, we often discuss notice periods or severance entitlements. After all, the vast majority of dismissals are without cause, in which case the most significant issue is determining the amount of notice or pay in lieu that the employee is entitled to.
Despite our best efforts, there are still many myths and misconceptions out there. Today, I want to clarify a few key points:
- It is not one month per year of service.
- While the “core” factors to be considered are length of service, age, character of employment and availability of similar employment, there are many other factors that can have an impact.
- There are no formulas or calculations; assessing what is reasonable notice is an art, not a science, and it can vary greatly from one judge to another.
- It is open to the parties to produce evidence of the availability of similar employment, which can impact the notice entitlement; for example, while the pandemic may have resulted in a reduction of available jobs, many industries are currently experiencing a dramatic shortage of workers which could result in reduced notice periods.
- Common law notice of dismissal is intended to be a bridge to the next job, and is subject to the law of mitigation: the employee is expected to make reasonable efforts to find new work, and their compensation can be reduced if they fail to do so or if they succeed in finding new work.
- All of this uncertainty regarding what is “reasonable” can be avoided with an enforceable termination clause in a contract of employment.
Calculating notice or severance entitlements
Employment standards legislation sets out the minimum entitlements, and they are based solely upon the length of service. However, the common law says that employees are also entitled to reasonable notice, and this is based upon a number of factors, including:
- length of employment
- the nature of their position
- the availability of similar employment.
There are many additional potential factors, including inducement: if an employee was lured away from secure employment, that can significantly lengthen their notice entitlement.
Contrary to popular belief, reasonable notice is not a month per year of service. It can be significantly more in some circumstances, and less in others, depending on the other factors. In some cases, a short-service employee can even be entitled to notice which is greater than the period of employment.
An art, not a science
Judges have a significant amount of discretion when assessing the entitlement to severance, which can make it impossible to definitively predict a specific individual’s entitlement. Take these two cases from last year:
- Ewach v. Whiteoak Ford Lincoln Sales Limited: A 61-year-old salesperson with 19.5 months of service as a salesperson awarded 2.5 months’ notice.
- Lenting v. Huron Tire: 22-year-old tire technician with two years of service awarded 2.5 months’ notice.
It is entirely possible that one or both of these cases would have been decided differently by a different judge, but we’ll never know, and appeal courts will not interfere with a severance award unless it is completely out of whack.
Impact of the job market
Recently, every Statement of claim alleging wrongful dismissal has included an allegation that the pandemic has made it ever harder for the plaintiff to find work and the notice period should be increased as a result. This may be true in theory, but most judges will not make assumptions or accept bald assertions: it is up to the parties to provide evidence of the job market.
Dismissed employees will have to show that there were few, if any, suitable jobs available that they were qualified for.
Conversely, we have seen a tremendous shortage of workers in many industries recently, and it is open to employers to produce evidence of that in order to show that the notice period should be reduced. Employers can also rely on such evidence to support an allegation that the employee did not make reasonable efforts to find new work, and that if they had done so, they should have been able to find work and mitigate their damages.
The impact of a termination clause
The entitlement to reasonable notice pursuant to common law can be displaced with an effective termination clause in an enforceable contract of employment. That can reduce the employer’s severance costs and avoid all of the uncertainty of assessing, negotiating and litigating what is reasonable.
As regular readers will know, these clauses are routinely challenged and found to be unenforceable; they must be drafted and implemented properly in order to achieve their purpose. Otherwise, they are not worth the paper they are printed on (to use an old expression made all the more irrelevant by our firm’s paperless practice).
The worst thing that an employer can do is assume that their severance costs are limited by a termination clause and then spend tens of thousands of dollars in litigation, only to find out that they were wrong and are liable for substantially greater severance, in addition to their legal costs, a portion of the plaintiff’s legal costs, and potentially additional damages.