Understanding Your Severance Package
Understanding Your Severance Package
Below, we discuss the most common things that are found in a severance offer / package
A termination letter / severance offer will usually include a deadline. The employee is told to accept the severance package by the deadline, or they will forfeit some compensation.
There is no “law” that determines how long that deadline should be. But, it should be a reasonable amount of time. Probably nothin less than a week.
Don’t panic. In the vast majority of cases, the employer’s first offer is not its best, nor does it represent an employee’s full entitlements at law. However, by adding the pressure of a deadline, a number of employees will sign out of fear.
If you sign it, you could be giving up significant entitlements.
Having said this, if you want more time to consider your severance package, then ask for more time! Any employer acting reasonably will give you more time. This one simple step should reduce your stress level and give you appropriate time to speak with us.
The amount of notice and / or compensation
The termination letter should set out the employee’s statutory or contractual entitlements, and clearly set out the additional severance pay the employer is offering to pay above the minimum entitlement in exchange for a Release.
An employer can give you either working notice or pay in lieu (compensation) or a combination of both. Both count towards your overall notice period.
If you are provided with compensation, it’s usually expressed in increments of weeks or months.
For a more detailed discussion on severance pay, visit our severance pay page, or for a quick way to help estimate your severance pay entitlements, try our severance pay calculator.
How any compensation will be paid out
If an employer is paying compensation instead of providing working notice, the compensation will usually be paid out as:
• Lump Sum: employer gives you a sum of money all at once
• Salary Continuation: employer pays the severance in instalments just like you were still working there (even though you don’t actually show up for work)
• Combination of Lump Sum and Salary Continuation
There are advantages and disadvantages to lump sum and salary continuation.
Treatment of your commissions
Normally, an employer will take the position that you are not entitled to any commissions.
Some will take the position that you are entitled to commissions that were owing to you at the time of dismissal.
Almost none will take the position that you are entitled the commissions you would have earned had it given you proper notice of your termination.
Absent written contractual language to the contrary, an employee is generally entitled to commissions already earned up to the date of their dismissal plus compensation for the “loss” of commissions prospectively (i.e. over the reasonable notice period).
Here is an example:
Sally earns $60,000 in base salary per year, plus an average of $20,000 in commissions. Sally is terminated immediately without cause. At the time of her termination, she was owed $5,000 in commissions (from deals that she already closed). For the sake of argument, let’s say Sally is entitled to 6 months of severance pay. Absent written contractual language to the contrary, she should get $30,000 in base salary, her $5,000 in commissions on deals that already closed, plus $10,000 for commissions she would have earned had she continued to work for 6 months.
Treatment of your bonus
It is the rare employer that will offer to pay a bonus at the point of termination. Indeed, its often the case that the employer “timed” the termination so it happened before any bonus would be paid out.
The employer, when pressed, will usually take the position that the contract does not permit bonuses to paid out after termination, or the company was not doing well enough for a bonus to be paid, or the employee’s performance wasn’t good enough to have warranted a bonus.
That said, absent contractual language to the contrary, a bonus or pro-rated portion of it will likely have to be paid under the common law, particularly where:
• The bonus was non-discretionary (i.e. based on performance, not whims of the employer)
• The bonus was regularly paid in the past
• The employee considered the bonus an integral part of their compensation
Treatment of benefits
Certain benefits, like group health benefits, must automatically be continued for a certain minimum period of time (up to 8 weeks) according to employment legislation.
However, the common law says that the employer is supposed to continue all forms of compensation (which includes benefits) for the entire notice period, which is often much longer than what employment legislation provides.
These are examples of benefits that might be referenced in your termination letter:
• Group Health and Dental
• Life Insurance*
• Accidental Death and Dismemberment*
• Short Term Disability and Long-Term Disability*
• Group RRSP
• Group Home and Auto Benefits
• LTIPs/STIPs/stock options/employee stock purchase plan
• Pension Plan
• Car Allowance
• Phone Allowance
• Employee Discount Plans
• Tuition/relocation reimbursement
• Deferred profit-sharing plan
• Club or membership dues
• Company-supplied automobile, cell, blackberry, laptop, etc.
• Home office reimbursement/equipment
• Tuition/relocation reimbursement
Whereas some health benefits like basic health and dental coverage can usually be continued beyond the statutory minimum timeframe, other benefits cannot. More accurately, the underlying policy won’t permit it. That’s usually the case with life insurance, accidental death and dismemberment, critical illness insurance, and short and long-term disability.
Speak with an experienced employment and disability lawyer to understand your rights.
Pension / RRSP
An employer typically tries to “cut off” its contributions to your RRSP / Pension (or else ends your participation in the plan) soon after you are terminated.
If the employer is offering salary continuation (instead of a lump sum) there is a greater chance the employer will continue your RRSP / Pension.
Sometimes an employer will offer a lump sum of money representing what contributions they would have made to your pension.
Unless there is express written language to the contrary, you should be entitled to continuation of your RRSP / Pension for the duration of the common law reasonable notice period, or else money instead.
An employer may offer career counseling to departing employees.
Typically, the employer offers this because they want the employee to begin job searching as quickly as possible. The faster an employee finds a job, the less the employer may have to pay the departing employee.
Career counseling is provided, typically, for 2-3 months.
If it’s offered, there is no harm in taking it. It’s a good way to brush up on your resume writing skills.
If the career-counseling is offered even without signing a Release, you should probably accept it. If you don’t, the employer will probably later argue that you failed to take all reasonable steps to mitigate your damages.
Letter of reference
Generally, an employer will not offer a true letter of reference. Employers frequently say “it’s not our policy to provide letters of reference”.
Instead, an employer might offer a letter of employment. It’s typically not very robust or useful. It usually states the employee’s name, start date, and termination date. We call that letter a “tombstone letter”.
We frequently negotiate for a letter of reference, or at least, a useful letter of employment.
Non-competition / non-solicitation
Sometimes an employer might ask you to sign a non-competition agreement or a non-solicitation agreement in order to get your severance package.
A severance package is meant to address the notice period you are entitled to, not to impose additional terms you did not agree to at the outset of your employment. If the employer wants to saddle you with future obligations, it’s not fair, and you should be seeking legal representation.
The employer will almost always include a “Release” with the severance offer. Basically, in order to get the severance package, you will need to sign the Release. For the most part, by signing a Release you are agreeing that you can no longer make any claims against your employee for anything.
Never, ever sign a release without understanding what rights you are giving up.
Ertl Lawyers negotiated a severance package that was worth almost 4 times what my employer was offering!!
– S.M., Account Executive, Toronto
Need Expert Help With Your Severance Pay?
When you contact us for a free consultation, we will thoroughly review your matter. We’ll tell you whether we believe you’re entitled to more severance pay than what your ex-employer is offering. We will also discuss expectations, timing, and costs with you. Our consultation is 100% comprehensive. It is designed to give you the information you need to make the best decision possible.
Employers and their legal counsel know that Ertl Lawyers are well-prepared to fight for our clients, which is why the majority of our matters are successfully negotiated without even having to start a legal claim.
We’d like to help you too. And, we believe that our help can make all the difference.
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