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In support of the simple severance settlement
Mon, 2007-08-27 11:02 — Robert Smithson
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When employees are forced to leave their employment, it is common for the employer to offer a payment in lieu of working notice of termination. This is frequently referred to as "severance". I am an advocate of keeping the structure of these severance payments as simple as possible.
Many lawyers and many employers seem to favour a fairly complicated severance structure which creates ongoing tasks and obligations for both parties. These settlements can span over a substantial period of time
and (in my view) serve only to drag out the cessation of the relationship.
A commonly used structure is based on a salary continuance arrangement. The employer continues paying the former employee's salary (and, often, providing ongoing benefits coverage) for some defined period of time.
During the salary continuance period, the individual is burdened with an obligation to search for employment. The individual may have to provide periodic reports of his job search efforts (and, presumably, the employer takes some time to review and consider those reports).
If the individual manages to locate employment during the salary continuance period, the salary payments come to a halt. At that time, the individual receives a lump sum payment (less deductions) often representing 50% of the wages which would have been paid during the balance of the salary continuance period.
The theory, I believe, is that this structure provides the individual with some motivation to search for other employment. It also provides the employer with some satisfaction that the employee is complying with her implied obligation to mitigate the losses she has suffered as a result of the termination of her employment. In practice, I don't think either objective is really achieved.
As I've said, one problem with this sort of structure is that it drags out the cessation of the relationship. It burdens both parties with the need to monitor how the former employee is acting in the course of his job search. And, it creates the potential for a legal dispute at some point in the future if the employer comes to the conclusion that the individual is not making sufficient efforts to locate a new job.
Just such a scenario played out recently in a B.C. court room. Construction firm Aker Kvaerner dismissed its president, John Nelson. The parties entered into a salary continuance form of settlement which called for ongoing payments to Nelson for 17 months. According to the settlement, Nelson was obligated to provide Aker with reasonable and regular reports of his job search and employment efforts.
After 8 months, Aker enquired about Nelson's job search efforts and asked him to provide monthly reports of his job search efforts. Nelson provided the reports but, ultimately, Aker cut off the severance payments on the basis that Nelson's job search efforts were insufficient.
Nelson sued, successfully, to obtain the balance of the severance payments. The B.C. Supreme Court agreed with Nelson that Aker's demands of him in relation to his job search efforts were not appropriate. In the end, all of the time, effort, and money Aker expended on chasing Nelson to ensure he was properly attempting to mitigate his losses was (in my view) entirely wasted.
I have never been a fan of severance arrangements which create the prospect of further legal disputes. My preference, on behalf of both employers and employees, is to come to an arrangement which provides the employee with an immediate lump sum payout.
Upon payment of the lump sum, the individual owes no further obligations to the employer and it matters not whether she ever lifts a finger to find another job. The employer is able to eliminate the individual from its mind and can get on with the operation of its business.
This structure does require some compromise on the part of both parties. The employee ends up with a smaller lump sum payment than the total of what the salary continuance payments would have amounted to under the alternative structure. The employer swallows the risk that the employee might find a job the next day and, thus, might have fully mitigated her losses.
Both parties gain benefits from this arrangement as well. The individual can move on with his life and has the opportunity to gain a windfall if he can get a job quickly. The employer can get its focus back on its business and avoids the additional costs associated with potentially fighting over the individual's failure to expend sufficient job search efforts.
It has been my experience that, once the employer's decision is made to terminate an individual's employment, it is best to bring the relationship to a conclusion as rapidly as possible. If you're of the same mind, you might consider the value of the simple severance settlement for effectively achieving that objective.
Robert Smithson is a partner at Pushor Mitchell LLP in Kelowna practicing exclusively in the area of labour and employment law. For more information about his practice, log onto http://www.pushormitchell.com/.
