Employment Law

Reducing the Cost of Employee Terminations: Part 4 (Final)

By January 15, 2020No Comments

This is my last blog on this topic.

My first blog discussed how to manage the costs and legal risks associated with employee terminations by including a well crafted legally enforceable termination clause in your employment contracts. The second blog discussed  just cause terminations and how an employment contract can take away a judge’s power to determine whether just cause exists in certain situations. The third blog discussed without just cause terminations and how you can significantly decrease termination pay owing in this scenario.

This blog will discuss different ways to structure termination payments as well as the benefits of offering a terminated employee a reference letter and/or outplacement counselling.

How to Structure Termination Pay

The three main options are: (i) lump sum payment; (ii) salary continuation or (iii) salary continuation and a lump sum payment if the person secures alternative employment by a specific date.

(i) Lump Sum Payment – If the employee is only owed the minimum termination pay and severance pay owed under the Employment Standards Act (the “ESA”) then it should be paid in a lump sum within the time limit prescribed under this law unless the employee agrees otherwise. My general rule of thumb is if the employer is prepared to pay up to three months termination pay the employer should consider paying it in a lump sum.

If an employer is prepared to pay more than 3 months pay then I normally suggest that a discount be built in because the employee has an opportunity to make a financial windwall. For example,  if the expected notice period is 12 months I wouldn’t offer a lump sum of 12 months because if the employee got a job after 8 months then the employee would receive 4 months more pay than a court would order the employer to pay.

If an employee is going to receive a lump sum payment I normally suggest that employee benefits stop at the end of the ESA notice period.

(ii) Salary Continuation – Assuming the person is owed more than ESA minimums and the employer is concerned the employee will solicit clients or employees, or may disparage the employer then I may suggest that termination pay be paid in periodic payments which are conditional on not soliciting and/or not disparaging.

(iii) Salary Continuation and a Lump Sum Payment (if person secures alternative employment by a date) – This option is common for long-service employees who are entitled to a long notice period. Under this option, the employer offers salary continuation (and often benefit continuation) until the earlier of a specific date or the date the employee starts alternative employment or self-employment.

If the employee secures alternative employment or self-employment during this time period then a lump sum payment is triggered; often 50% of the payments the employee would otherwise have received. This motivates the employee to quickly seek alternative work and results in a win/win situation.

All of these options can be incorporated into the termination clause of an employment contract.

Reasons to Offer a Reference Letter

Until a settlement agreement is reached it is in the employer’s economic interest to help an employee find work as quickly as possible.

There is no legal obligation to provide a terminated employee with a reference letter but doing so can help an employee secure alternative employment more quickly – particularly long-service employees. If an employee earning $ 48000 a year secures a job two months earlier because of a positive reference then the employer has saved $ 8000 in termination pay.

There is generally no good reason to refuse to provide a factually accurate reference letter to a good performing employee who is terminated without cause. An employee who has been terminated because of a restructuring is a common example. In fact, I believe some judges will extend the notice period if an employer refuses to provide a reference letter.

I generally suggest that a reference letter be provided without condition; that is, it is not a term of settlement.

Reasons to Offer Outplacement Counselling

Like reference letters, there is no legal obligation to provide a terminated employee with outplacement counselling but doing so can help an employee secure alternative employment more quickly.

The cost of outplacement counselling depends on the services offered in the package. The more services the higher the cost. For long-service employees with employer specific skills I almost always suggest that the employer consider offering outplacement counselling. Asking a long-service employer who has not looked for work since being hired to find a job without any support is generally not a good idea.

At a minimum, the person needs help to create or update their resume and to learn how to look for work online. Some people may need a place to go during the day while they look for work. Others may need help learning how to interview.

For strategic reasons, I sometimes suggest that an employer pay for outplacement counselling services while settlement discussions take place.

Conclusion

An employee termination can be very expensive. I therefore suggest that all employers consult with their employment lawyer before terminating an employee. I often tell employers that I will provide much more value if they call me 10 minutes before a termination as opposed to 10 minutes after an employee termination.

 

For over 30 years, Doug MacLeod of the MacLeod Law Firm (www.macleodlawfirm.ca)  has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at doug@macleodlawfirm.ca