Figuring out how much severance an employee is entitled to is not easy. It is generally wise to consult with an employment lawyer. This article introduces some of the factors that can affect an employee’s entitlement.
The value of pay in lieu of notice depends primarily on:
- the duration of the notice period (i.e. measured in days, weeks or months)
- the value of the employee’s total compensation package
- whether the employee has mitigated (or offset) their losses by finding comparable alternative employment.
By extension, the usual formula a judge would apply is:
pay-in-lieu = notice period × compensation − mitigation income
The general idea is that an employee who is dismissed without notice or cause is entitled to pay-in-lieu of notice that puts them in the position they would have been in had they received working notice of termination.
Note, however, that this breakdown assumes you are entitled to “common law” reasonable notice, which may not be the case (see contracting out of common law notice). The above also assumes we’re asking the question at the stage of a trial. More considerations arise when negotiating an early resolution.
The remainder of this article briefly addresses:
- The notice period
- Elements of compensation
- Contracts that deviate from common law notice
- Statutory minimums
- Damages outside the notice period
- The duty to mitigate
The notice period
The notice period refers to the length of advanced notice of dismissal an employee is entitled to, absent cause for dismissal without notice. This is often called reasonable notice or common law notice. If no advanced notice is given, the employee may be entitled to compensation in lieu of notice.
A judge would determine the duration of the notice period based the full circumstances of the case. Usually, the most important factors are the employee’s age, their length of service, and the type of job they held. Longer service often translates to a longer notice period. And older and more senior employees generally are awarded longer notice periods than younger or junior employees. Other factors that affect the length of reasonable notice include inducement, poor economy, and the availability of similar employment.
Cases show the length of notice can vary dramatically, from nothing up to two years, which is seen as an unofficial maximum the law will allow.
Elements of compensation
The law is that all elements of an employee’s compensation package should be accounted for when calculating the value of notice of termination, unless the contract contains an enforceable term exempting entitlement to a certain payment. This is consistent with the idea that damages should put the plaintiff in the position they would have been in, had there been no breach of contract.
Common elements of compensation include base salary, variable compensation schemes (such as bonus or commission payments), vehicle and living allowances, benefits, and savings plan or pension contributions.
Contracting out of common law notice
The requirement to give reasonable notice of termination is implied at common law. Parties can provide for alternative arrangements in the contract, thus displacing the common law. Usually these termination clauses are drafted to the advantage of the employer, providing for less notice than the common law would give. But some employees (especially executive and upper management workers) can negotiate more favourable terms.
Termination clauses can be challenging to draft. If not enforceable, the clause would fail to disentitle an employee to common law notice.
Employment standards legislation limits the freedom of parties to contract out of the common law of reasonable notice by setting a minimum mandatory notice of termination or pay-in-lieu. Parties cannot contract out of those statutory minimums. If a termination clause provides for notice or pay in lieu that does not meet the minimum standard, it will be unenforceable and will leave the employee entitled to seek damages based on common law reasonable notice.
It is common to see termination clauses that attempt to restrict the employee’s right to notice to the statutory minimums.
Damages outside the notice period
Damages for pay-in-lieu do not extend to other aspects of financial losses resulting from the loss of work. However, Courts sometimes award employees additional damages when companies behave wrongly or in bad faith, such as punitive or aggravated damages, or damages for mental distress. Similarly, when the dismissal was in violation of human rights legislation, the Tribunal would have jurisdiction to award general damages for a worker’s injury to their dignity and self-respect.
The duty to mitigate
When an employee is dismissed without notice, they incur financial losses. However, they have an obligation to try to mitigate (or offset) their losses by finding alternative employment. That means an employee may not be entitled to full pay over the notice period. If the worker gets a new job during the notice period, their claim to compensation will generally (though not always) be reduced by the income they receive in the new job.
When negotiating early resolution of a claim for a without-notice dismissal, the parties should consider the likelihood of mitigation. For example, an employee may prima facie have a claim to pay in lieu of 24 months’ notice, but if the economy is booming and they should be able to get comparable alternative employment fairly quickly, a court could reduce their compensation. The chance of mitigation is a point of uncertainty that both employers and employees should bear in mind when determining what severance payment would be fair.
One result of the duty to mitigate is that we often can’t say what the actual value of a claim is until the notice period has expired and we can see how much of the losses (if any) were offset.
Consider this example: A long-serving management employee in her early 60s might have been entitled to two years’ notice, but if she gets comparable new work at the same or greater pay within two months (and if she stays in that new job for two years), then the actual value of her claim is pay in lieu of two months. Because neither the employee nor the employer can typically know how long it will take to mitigate, deciding whether to accept (or how much to offer) has an element of gambling. An employee could accept a low offer but mitigate very quickly and still be in a better position that had they received working notice. Or they could accept a low offer hoping they’ll mitigate, but fail to do so, and they end up worse off than had they received working notice.