What should be included in a termination or settlement package?

'The best advice is the golden rule: treat the employee in a way that won't instil any anger'

What should be included in a termination or settlement package?

With layoffs looming in many industries, HR professionals might be very busy this year with the grim task of handing out termination agreements to workers.

In order to get everything right, there are a number of legal considerations employers have to contend with, so wrongful dismissal claims are kept to a minimum.

With this in mind, Canadian HR Reporter asked Howard Levitt, senior partner at Levitt Sheikh in Toronto, about some of the items that must be included in a settlement package for departing employees.

Q: What are some of the main considerations for employers in offering a settlement package?

A: “Getting a release is first and foremost because you don’t want to think you’ll have a settlement and not have relief proving the settlement and preventing the employee from suing.

The second thing is: What is it you want from that employee? The employer should put their mind to that.

Do they want confidentiality? There may already be a confidentiality agreement the employee signed — there’s an inherent obligation of confidentiality in law but even if they signed something some years ago, you want to remind them as part of the settlement that they have to keep what they’ve learned in the workplace confidential, and you want to make sure that’s reinforced.

[Also consider] non-disparagement agreements… especially at a time of layoffs, where people at the company may want to recruit down the line, they don’t want employees or former employees be contacted by other potential recruits saying bad things about them.”

With the new year upon us, now is a great time to update employment contracts, say two other lawyers.

Q: What can an employer do to ensure an employee doesn’t sue?

A: “Let’s assume [severance] is worth 18 months; if you offer nine months, you’re probably going to get sued. If you offer 14 months, you’re probably not going to get sued because they’re not going to bother suing for what might be another four months, and they’re not going to find a plaintiff’s lawyer in contingency to take the case for maybe only another four months.

The chance of that happening, especially in a hot job market, is remote and they’re probably going to take the discount, especially if they get the money upfront.”

Q: Should employers offer a lump sum or salary continuance?

A: “A court only gives them their actual damages over the period of notice, they don’t give them a windfall, so if you’re going to award a lump sum, there’s generally going to be a significant discount. So the case is worth 18 months in court, you might want to give an employee, for example, a choice of 15 months, paid until they get other work or nine months in a lump sum cheque right now.

If they employee thinks they can get a job in less than nine months, even though the case might be particularly worth 18 months, they might take nine months and often I have my clients give a choice of a smaller lump sum or a longer, what we call, bridging payment.”

Q: What other remuneration should be considered?

A: “If somebody is an investment banker making a million and a half a year, this base salary may be $125K, the million and a half might be a combination of bonuses and restricted stock units and the restricted stock units might not be payable for another three years because generally restricted stock units aren’t paid until unless the employee is there for the next period of time paying one-third each, one year apart.

So what’s the case worth? Well, the courts will give them what they would have got over a period of notice in them. It’s not just salary. Salary might be enough for your average employee who gets a salary and some fringe benefits worth 10 per cent of their package and they may not care much about the benefits.

But for somebody who’s in a different position, generally for executives or sales employees who are commission-based, what are they going to be entitled to over the period of notice?

What about bonuses? Well, bonuses can be called discretionary and basically, every bonus claim I have ever seen is called discretionary but the courts say discretion must be reasonably exercised.

If you’ve got a bonus every year, the employer can say, ‘The employee never would have been given the bonus;’ the courts will never accept that. They’ll say, ‘A bonus becomes a material portion, a deemed portion of their remuneration and the fact you have particular word discretion in there doesn’t matter because it has become a portion of the remuneration and, therefore, you have to pay the bonus during the period of notice.”

More termination provisions are being considered unenforceable due to recent court rulings, according to another employment lawyer.

Q: What about non-monetary compensation?

A: “[Consider if you] have parking at the company. That may be worth a lot of money, the free parking, or a 407 pass but you’re not going to be using that parking if you are not working, or you’re not going to be using it for a 407 pass anymore. You don’t need it to get work or to do your route sales. The club membership, we’re giving you that because you do business for the company and you get clients for us. We don’t need you to do that anymore, or a car allowance to drive around a lot. You won’t be doing that drive for us anymore.

Those are things the courts will give them as part of the compensation during the period of notice in a wrongful dismissal claim. Therefore, you don’t have to give it to them as part of a severance package because it wouldn’t be entitled to in any way at law in a wrongful dismissal claim.”

Q: What is the best advice for HR people?

A: “The best advice is the golden rule: treat the employee in a way that won’t instil any anger; and whatever anger the employee is going to inherently have from being terminated, try and do things to dissipate, to make them feel cared for and feel not used or abused, and to make them feel that they’re valued and that there’s a reference coming to them down the line.

It’s the role of the HR manager to make sure those feelings aren’t there or minimize the extent possible.”

 

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