When it comes to severance, all weeks are not created equal

All forms of compensation are supposed to continue during notice period

Stuart Rudner

By Stuart Rudner

When employers have to let someone go, they consider how many weeks or months of notice they must provide.

When employees are provided with severance packages, they compare notes on how many weeks or months they received. Often, these are considered in the context of weeks or months per year of service.

However, the focus on the length of the notice period ignores a very important factor: What forms of compensation are continuing during the notice period? The answer can make a tremendous difference in assessing whether or not the offer is appropriate.

By default, all forms of compensation are supposed to continue during the notice period, even if the employee is not required to attend at work. The intention is that the employee will receive the same remuneration as if they were actively employed during the notice period. There are some exceptions, usually created by contract or policy.

For example, some policies will provide that the benefit in question, such as pension, will cease once the employee is no longer actively employed. Well-drafted employment contracts will do the same for items such as disability insurance, which are difficult to continue beyond the statutory notice period.

When I advise individuals that have lost their job, I encourage them to consider more than the number of months that they have received. This is particularly true for individuals that receive a significant portion of their income through variable compensation. For example, a salesperson that is paid 25 per cent by way of salary and 75 per cent by way of commission may think they have been provided with a generous severance package based upon the number of months. However, if the package provides for base salary only, then it is really worth only one-quarter of the time period stated.

Similarly, many employers offer severance packages that do not include bonuses, even if the bonuses were automatic and would undoubtedly have been paid if the individual was working during the notice period. Another common issue relates to car allowances.

Contrary to the common view, car allowances are not simply reimbursement for business expenses, because they are paid to the employee every month, regardless of the amount of driving that they do for work purposes.

They are included on an employee's T4 statements as taxable benefits because they are considered to be a benefit. Conversely, reimbursement for mileage incurred in work-related activities is not considered to be a benefit. Car allowances must therefore continue during periods of salary and benefit continuance.

Likewise, if an employer provides an automobile, that is a benefit and should also continue during the notice period. In most cases, the employer will not want to continue providing an actual vehicle to the dismissed employee when they are no longer working. I often work with employers to offer the employee in question a choice: they can either by out the lease and keep the car they have been driving, or they can be compensated through payments that would be equivalent to the monthly lease payments during the notice period. Either way, it should form part of the severance package.

As discussed in previous posts, disability insurance is a controversial issue that causes a with headaches for employers at the time of termination. As a benefit, disability coverage should continue during the notice period.

However, there are almost no insurance companies that will continue the coverage beyond the statutory notice period. For decades, this issue seems to have stayed below the radar, but we have seen some recent cases in which employees that became disabled during the common law notice period successfully sue their former employer as a result of the fact their disability coverage ended.

In those cases, the employer was found to be liable for the disability benefits the employee should have received. In other words, the employer became the insurer, for all intents and purposes. This can be a substantial potential liability. For that reason, I work with employers in order to minimize the risk. The ideal way to do so is to include language in the employment contract that clearly states that disability coverage will not continue beyond the statutory notice period. If it is too late do that, then the employer should either negotiate a severance package and obtain a full and final release from the employee before disability coverage ceases, or they should consider arranging alternative coverage through another insurer. While this does involve some cost, it is far less than the potential liability for lost disability benefits.

When considering a severance package, people, whether they be employees or employers, should avoid the temptation to focus solely on the number of weeks or months. Employers that do so risk significant potential liability, and employees that do so may find that the severance package they gleefully accepted is not worth nearly as much as they originally thought.

Stuart Rudner is an HR lawyer and a founding partner of Rudner MacDonald LLP, a Toronto-based firm specializing in Canadian 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 srudner@rudnermacdonald.com. You can also follow him on Twitter @CanadianHRLaw and join his Canadian HR Law Group on LinkedIn. 

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