Putting the termination package together
By Stuart Rudner
In Terminations 101 (Part one), I discussed how the applicable notice period should be assessed.
Once an organization has assessed the amount of notice required, they must determine how they are going to provide it. Unless they are limited by some contractual provision that they agreed to previously, employers have significant flexibility with respect to how the dismissal is structured. Their options include the following:
•continuation of salary and benefits
•a lump-sum payment
•any combination of the above.
Many people are surprised to learn that the default, at law, is that an employer will provide notice of dismissal. They do not have to provide pay in lieu of notice or “severance.” Many employers chose to do so, but I encourage our clients to at least consider working notice in appropriate situations. While it will certainly not work in every circumstance, there are many cases in which working notice is viable, and will allow the employer to at least get some value for their money. It can often be effective to combine a period of working notice with a lump sum payment that is contingent upon the individual completing the period of working notice and performing their duties satisfactorily.
If an employer decides not to provide working notice, they can offer continuation of salary and benefits, or a lump-sum payment. The advantage to the former is that it can include a clawback provision, which provides that the payments will end if the individual obtains new employment. Such a clause can also include a provision a portion of the balance of payments remaining will then be paid out as a lump sum. If such an offer is made, then the sooner that the individual obtains new employment, the sooner that the employer will stop having to pay them. For that reason, it is in the employer’s best interest to assist the individual in obtaining new employment.
Although many employers currently have policies prohibiting the provision of substantial references, in the vast major of cases there is absolutely no need for the employer to take such a position. In most cases, it should be possible to provide some positive commentary about the individual. However, where the dismissal is not for cause, they can usually find something nice to say. Employers should never lie about the individual, either positively or negatively. In addition to providing references, employers should consider providing outplacement counseling in appropriate circumstances. While there is an upfront cost to this, it can often result in savings if the individual finds a new job sooner.
Lump-sum payments can be advantageous to the employer in the sense that they generally allow the employer to take the employee “off the books” sooner. Furthermore, they maybe able to negotiate an agreement whereby the amount paid is lesser than it would be if the payments are made by way of salary continuance, and they may also be able to negotiate an agreement whereby employment-related benefits end sooner. The lump-sum payments can also be advantageous to the employee, in the sense that the applicable tax withholdings are typically lower than they would be otherwise. Conversely, the downside of a lump sum payment to the employer is that they will have to make the payment regardless of if and when the individual obtains new employment.
Employers should remember that by default, they have the right to decide how they will provide notice of dismissal or pay in lieu. Employees are not "entitled" to a package in most cases.
Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or firstname.lastname@example.org. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.