What Is Included In A Severance Package?
At Hutchison Oss-Cech Marlatt, we pride ourselves on providing up to date advice and information in employment law, including the impact of the COVID-19 Pandemic on employment law and the assessment of employment law claims. Dana G. Quantz at our firm has provided the below summary to help people consider their legal rights in this pandemic.
What is included in a severance package?
It is a frequent question that employees and employers have in trying to address the value of a severance payment to end an employment relationship. This blog post is going to set out a few of the items that need consideration when evaluating the fairness and completeness of a severance package. We assume for the sake of this blog post that people are clearly employees as different considerations apply to dependent contractors or independent contractors.
Contract
The first place to look is the written employment contract. Many employment contracts set out the amount of notice that an employer must give an employee if the employer decides to terminate the employment contract. Contracts can have many different types of terms and there is no one set standard form of contract. Typical, employment contracts will include language setting out:
- the amount of notice an employer must give to an employee (often depending upon tenure of employee at time of termination),
- whether the employer can pay the employee in lieu of advanced notice, or
- whether the notice includes salary only or salary and extended benefits for example.
There are several elements of employment contracts that are required before they can set parameters on severance:
- the contract was signed before the employment started or it was signed in exchange for some valuable consideration;
- the contract does not violate the minimum requirements of the Employment Standards Act; and,
- the contract was not rendered void or unenforceable by subsequent events in the employment relationship (e.g., a promotion or change to the structure of the employment that was not contemplated in the contract).
The Employment Standards Act
The most frequent situation where a contract is rendered void is due to it being in violation of the Employment Standards Act and this often happens in one of two scenarios.
The first scenario is where the employment contract hypothetically results in less compensation for termination than the Employment Standards Act. Section 63 of the Employment Standards Act sets out the minimum standards:
63 (1) After 3 consecutive months of employment, the employer becomes liable to pay an employee an amount equal to one week’s wages as compensation for length of service.
(2) The employer’s liability for compensation for length of service increases as follows:
- (a) after 12 consecutive months of employment, to an amount equal to 2 weeks’ wages;
- (b) after 3 consecutive years of employment, to an amount equal to 3 weeks’ wages plus one additional week’s wages for each additional year of employment, to a maximum of 8 weeks’ wages.
For example, if the contract has a term where an employee has a probationary period of 6 months where they will not receive any notice or pay in-lieu of notice then that contract is void. It is void because the minimum standard under section 63 of the Employment Standards Act requires a minimum of one weeks’ wages after 3 months’ of work.
Another example is where an employment contract sets out a term that an employee is entitled to one full month notice if their employment is terminated. As the Employment Standards Act allows up to two months’ wages, this contractual clause is void and unenforceable even if the employee would not be entitled to two months’ wages under the Employment Standards Act. It is sufficient that the contractual term is hypothetically void.
The second scenario is where the contract hypothetically limits the types of wages and salary available under the notice period. Above in section 63 of the Employment Standards Act you will notice that it refers to notice as an amount equal to a certain number of week’s “wages”. “Wages” is defined specifically in section 1 of the Employment Standards Act as follows:
“wages” includes
(a) salaries, commissions or money, paid or payable by an employer to an employee for work,
(b) money that is paid or payable by an employer as an incentive and relates to hours of work, production or efficiency,
(c) money, including the amount of any liability under section 63, required to be paid by an employer to an employee under this Act,
(d) money required to be paid in accordance with
- (i) a determination, other than costs required to be paid under section 79 (1) (f), or
- (ii) a settlement agreement or an order of the tribunal, and
(e) in Parts 10 and 11, money required under a contract of employment to be paid, for an employee’s benefit, to a fund, insurer or other person,
but does not include
(f) gratuities,
(g) money that is paid at the discretion of the employer and is not related to hours of work, production or efficiency,
(h) allowances or expenses,
(i) penalties, and
(j) an administrative fee imposed under section 30.1;
The Employment Standards Tribunal has regularly interpreted incentive pay to include bonuses, for example. If an employment contract tries to limit the compensation to only an hourly wage when the employee is entitled to commissions or bonuses in the terms of their employment, then the contract is likely in violation of the minimum requirements in the Employment Standards Act.
No Contract means reasonable notice
If there is no contract, then the amount of reasonable notice is determined according to the common law. In the case of Wilson v Pomerleau Inc., 2021 BCSC 388, the Court summarized the considerations as follows:
[20] The task is to determine what period of notice is reasonable in all of the circumstances. In Ansari v. British Columbia Hydro and Power Authority (1986), 2 B.C.L.R. (2d) 33 (S.C.) (aff’d [1986] B.C.J. No. 3006 (C.A.)) at para. 15, this Court adopted the well-known factors to be considered, arising from Bardal v. Globe and Mail Ltd. (1960), 24 D.L.R. (2d) 140 (Ont. H.C.) at 145:
- There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.
[21] At paras. 41-42 of Ansari, Chief Justice McEachern (as he then was) stated that the most important factors for determining reasonable notice are age, the character of the employment, length of service, and availability of similar employment having regard to a person’s experience, training and qualifications.
In these cases, courts and lawyers will often look at the particulars considerations of the employment and try to find comparable cases to find a range of reasonable notice that is possible. Employees and employers can often disagree over the amount of notice required.
Similar to the Employment Standards Act, reasonable notice is always expressed in the amount of a period of time that the employer should have given to an employee to notify them that their employment is ending. The maximum available in British Columbia is 24 months.
Damages
Once you have determined the amount of notice that is required, the next step is figuring out the value of that notice. The value of that notice is the amount of monetary compensation that an employee would have earned if the employer had given proper notice. Usually, this compensation includes salary, commissions, bonuses, and other types of benefits and compensation. It is the full extent of employment compensation because the employer is compensating an employee for their lost opportunity to work during the notice period.
A particularly illustrative case is called Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26. In this case, the employee was constructively dismissed (i.e., the employer’s conduct showed that it was repudiating any employment agreement) and the trial court found that Mr. Matthews was entitled to 15 months’ reasonable notice. However, 13 months after Mr. Matthews’ dismissal the company went public and was sold, which activated entitlement to a payout under the company’s long-term incentive plan that rewarded senior employees like Mr. Matthews. If Mr. Matthews had been working at the time of this sale, he would have been entitled to just over $1 Million dollars in compensation. At trial, the trial judge awarded Mr. Matthews that compensation finding that had the employer given proper reasonable notice then Mr. Matthews would have been working at the time of the sale. Ultimately, the Supreme Court of Canada agreed with this analysis finding that:
[49] Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period (Wallace, at paras. 65-67). This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period” (para. 115). Whether payments under incentive bonuses, such as the LTIP in this case, are to be included in these damages is a common and recurring issue in the law of wrongful dismissal. To answer this question, the trial judge relied on Paquette and Lin from the Court of Appeal for Ontario. I believe he took the right approach.
…
[53] I agree with van Rensburg J.A. that this is the appropriate approach. It accords with basic principles of damages for constructive dismissal, anchoring the analysis around reasonable notice. As the court recognized in Taggart, and reiterated in Paquette, when employees sue for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice (see also Iacobucci v. WIC Radio Ltd., 1999 BCCA 753, 72 B.C.L.R. (3d) 234, at paras. 19 and 24; Gillies v. Goldman Sachs Canada Inc., 2001 BCCA 683, 95 B.C.L.R. (3d) 260, at paras. 10-12 and 25; Keays, at paras. 54-55). Proceeding directly to an examination of contractual terms divorces the question of damages from the underlying breach, which is an error in principle.
[54] Moreover, the approach in Paquette respects the well-established understanding that the contract effectively “remains alive” for the purposes of assessing the employee’s damages, in order to determine what compensation the employee would have been entitled to but for the dismissal (see, e.g., Nygard Int. Ltd. v. Robinson (1990), 46 B.C.L.R. (2d) 103 (C.A.), at pp. 106-7, per Southin J.A., concurring; Gillies, at para. 17).
[55] Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
Seek Legal Advice
If you are an employee who has been dismissed from their employment, then we encourage you to speak to one of our lawyers regarding wrongful dismissal and other potential employment law claims. Contact us and we can help you evaluate whether you have a viable claim.
