BE PRESENTED IN A
LUMP SUM FORM.
For example, whereas a 65-year-old employee with 10 years’ ser-vice
in a small company might be entitled to 10 to 15 months of
“reasonable notice” under the common law, that same employee
could receive as little as eight weeks pay in lieu of notice under a
well-drafted termination provision.
Even more significantly, an employee who is terminated short-ly
after being lured away from a secure, long-term job might be
entitled to months or even years worth of severance under the
common law. That same employee could be entitled to only a few
weeks of notice – or even less – by executing a contract with a
well-drafted termination provision.
The cost savings on that one employee could constitute a six-figure
credit on the balance sheet.
Employers concerned that these clauses are not fair to the work-er
or that they will make it difficult to attract good candidates
should bear in mind that there is no one-size-fits-all approach to
While some companies offer only the employment standards
baseline in their contracts, this is not the only option. There is a
vast middle ground between the bare minimum and the common
law maximum. Contracts can be drafted to provide for an appro-priate
severance arrangement that balances the employer’s need
to reduce its financial exposure with the employee’s desire for a
“buffer” between jobs.
The key for many companies is not necessarily reducing their
severance obligations to the lowest possible figure, but rather cre-ating
certainty as to their potential liabilities, thereby decreasing
risk and legal costs.
STRUCTURING SEVERANCE ARRANGEMENTS
Many companies mistakenly assume that severance packages must
be presented in a lump sum form. Barring a contractual promise to
the contrary, many employers offer a more limited salary continu-ation,
which ends if the employee finds work elsewhere. The idea
is to avoid paying unnecessary windfalls to employees who might
“mitigate” their legal claims by quickly reemploying elsewhere.
Moreover, businesses may not be aware that they have the right
to provide for “working notice” in lieu of severance payouts. As
the name suggests, this sort of arrangement requires an employee
to continue working for the company during their notice peri-od
– instead of receiving a series of cheques without providing
any value whatsoever. Working notice is absolutely permissible,
provided that certain minimum statutory entitlements are other-wise
paid out, the work is essentially unchanged in all fundamental
respects, and the employee is given a reasonable opportunity to en-gage
in their job search.
Aside from the additional production this arrangement may
provide for, there are two additional monetary advantages to this
approach. First, when employees resign during a period of work-ing
notice, they are either completely disentitled from receiving
any further payments from the company, or limited to only a cer-tain
Secondly, because many employees would prefer to receive pay-ments
in lieu of working notice, they will often hire lawyers to
contact the company in the hopes of negotiating a discounted sev-erance
payment as a substitute for being require to “work out” their
In the right circumstances, this strategy can result in significant
THE IMPACT OF BONUS PLANS
The other big question that arises in the context of employee dis-missals
is the treatment of bonuses upon termination. The rule
of thumb is that an employee must be “made whole” during their
period of reasonable notice. That means if an employee typically
earns a bonus from year to year, that employee has two specific bo-nus
entitlements upon termination:
a) A payment for the portion of the fiscal year in which they
actually worked; and
b) A payment during the period of reasonable notice itself.
The financial consequences of these rules can be enormous.
In fact, particularly where bonuses are an integral aspect of the
remuneration structure, bonus payments may even outstrip the re-mainder
of an employee’s severance-related entitlements.
To counter the significant financial risk associated with this de-fault
legal rule, businesses are well-advised to put in place carefully
drafted bonus plans – or better yet, consider putting language
right into employment agreements regarding the treatment of
bonuses on termination.
By using the right language and properly implementing it, an em-ployer
may be able to ensure that employees will only be allowed to
receive bonuses when they are actively employed on the day a bonus
is paid out – thus avoiding the usual bonus payouts required on ter-mination.
To accomplish this objective, the bonus language must
be very specific; among other things, it cannot violate employment
standards legislation and it must define exactly what constitutes “ac-tive
employment” for the purposes of the clause.
The issue of bonuses has become a hot-button topic for the
courts over the past couple of years, so a qualified employment
lawyer should be consulted to ensure the right wording is used in
a bonus plan or employment contract.
By implementing these strategies, human resource specialists
may become local heroes within the management structure of
their organizations. n
Daniel Chodos is a partner at Whitten & Lublin
34 ❚ OCTOBER 2017 ❚ HR PROFESSIONAL