By: Stephanie McDonald and Baljinder (Bal) Singh Tiwana
When you receive a severance or termination offer, it can be difficult to understand whether the package is fair. This guide walks you through the same steps lawyers use when evaluating a severance package.
STEP 1 — Review the Termination Clause
Start by examining the termination clause in your employment contract to determine whether it is enforceable. Ask the following questions:
- Does the clause comply with the Employment Standards Act (ESA)? Any clause that breaches the ESA is unenforceable.
- Is the wording ambiguous? (Courts interpret ambiguity in favour of the employee).
- Does the clause legally create a maximum severance/notice entitlement?
- Is the clause otherwise unenforceable?
If a termination clause:
- Breaches the ESA;
- Doesn’t create a legal limit to your notice entitlement;
- Is ambiguous; or
- Is otherwise unenforceable,
then the Courts will decide not to enforce it. When a clause is unenforceable, the employee is entitled to common law reasonable notice, which provides significantly greater compensation than your minimum ESA entitlements.
STEP 2 — Review the Monetary Offer
Begin by calculating your minimum ESA entitlements, then compare them with what the employer is offering you.
Key questions about compensation
- Are you receiving the correct amount of ESA notice or termination pay and severance pay?
- Does the offer reflect your full compensation, not just base salary? Consider whether it includes:
- Bonuses (guaranteed, discretionary, STIP, LTIP)
- Commissions earned
- Car or phone allowances
- RRSP or pension contributions
- Stock options and whether they vest during the notice period
- Are benefits continued for the correct duration?
- Are vacation pay, outstanding expenses, and unpaid wages included?
- Does the offer exceed your minimum entitlements?
- Is the offer fair considering your common law notice entitlements?
Check for and understand restrictive clauses
- Clawback clause: Does severance or notice stop if you get a new job during the notice period?
- Release requirement: Does the employer improperly require you to sign a release to receive ESA minimums? In Ontario, ESA minimums must be paid regardless of any release. You may sign a release only when you are receiving additional consideration above ESA minimums, and the release must be fair.
- Conduct Provisions: Does the termination offer require you to conduct yourself in a particular manner? Many deferred compensation policies require you not to engage in any conduct that could amount to just cause during the notice period.
- Non-Disparagement: Does the severance offer require you not to speak negatively about the employer?
- Confidentiality: Most severance offers require you to keep the terms of settlement confidential.
While most of these restrictive clauses are commercially reasonable and enforceable, it’s essential that you understand them to protect your compensation.
STEP 3 — Assess Whether the Offer Is Reasonable
Compare:
- What a Court would likely award (common-law reasonable notice)
vs. - What the employer is offering in settlement
Courts determine reasonable notice using factors such as:
- Length of service
- Age
- Position and level of responsibility
- Managerial vs. non-managerial role
- Availability of similar jobs
- Economic conditions
- Barriers to finding new work (health, caregiving, seasonal hiring, limited local market, etc).
While it would be ideal to immediately recover 100% of your common law notice entitlement, this is rarely possible. Notice and severance is meant to compensate you while you are off work. So employers often expect a discount if there’s a high likelihood you’ll get a new job quickly. Therefore, we often recommend that our clients accept a reasonable compromise to their full entitlements to account for:
- Legal fees
- The time litigation takes
- Uncertainty of litigation
- The value of receiving compensation sooner rather than later
Reputation Protection
Many employers want departing employees to sign a non-disparagement clause. This is for the employer to protect their reputation. In some circumstances, it may be reasonable to request similar protection in return. For example, you can negotiate a mutual non-disparagement clause or the provision of a positive letter of reference.
Conclusion
Reading a severance package requires more than reviewing the dollar amount. You must also confirm whether the compensation reflects your full legal entitlements and whether the termination clause is enforceable. If the clause is invalid, your bargaining power increases substantially and you may be entitled to a significantly larger and more favourable settlement.
This guide is meant for informational use only. We always recommend that the entire situation be reviewed carefully by a lawyer. However, by understanding the framework employment lawyers apply, you can better navigate your termination with certainty.
Workplace Sage Legal can review your severance package and negotiate the best terms possible, helping you move forward with confidence. Book a consultation today.
DISCLAIMER: This article/blog is provided for educational/informational purposes only. The views expressed are solely those of the author(s) and should not be attributed to any other party not listed as the author(s).
While reasonable efforts have been made to ensure the accuracy of the content provided, it does not constitute legal advice. Prior to relying on any aspect of this article, you should consult with a suitably qualified legal professional promptly in your relevant jurisdiction, to obtain advice tailored to your individual circumstances
Nothing in this article should be interpreted as forming a solicitor-client relationship or construed as a solicitation for legal services.
