Contractual Notice or Severance Entitlement Provisions: Considerations for Employers  

publication 

Spring 2007 - (Lang Michener Employment and Labour Brief)

Lang Michener Employment and Labour Brief
Under Canadian common law, an employee who is terminated without cause is entitled to receive reasonable notice or severance in lieu of notice. Sever­ance in lieu can include not only the salary the employee would have earned over the notice period, but also employer pension or RRSP contributions, the value of medical, extended health and other non-salary benefits, and in certain instances, bonus or other incentive payments. Since reason­able notice can range up to approximately 24 months, depending on factors such as the age of the employee, length of service and duties and responsibilities, the common law legal obligation on employers can be extremely onerous. 

Accordingly, some employers choose to negotiate and establish severance entitlements with new employees as a contractual term at the time of hiring. It is well settled under Canadian law that a contract of employment may provide for a severance entitlement which differs from what would other­wise be required under common law. However, it is also well settled that an employer may not contract for a defined notice or severance entitlement which does not at least meet the statutory notice or pay in lieu requirement set out in the applicable employment standards legislation. 

For example, in British Columbia under the Employment Standards Act, an employee is entitled to receive one week's notice or pay in lieu following three months of employment. This increases to two weeks' notice or pay in lieu on the employee's first anniversary, and there­after increases to three weeks on the third anniversary and one additional week for each complete year of service to a maximum of eight weeks' notice or pay in lieu. 

Two recent British Columbia court cases are instructive in illustrating the care which must be taken in drafting defined notice, or severance in lieu provisions in em­ploy­ment contracts. In Dodich v. Leisure Care Canada, The O'Keefe Company, a 2006 decision of the British Columbia Supreme Court, the contract of em­ployment included a termination provision which provided that the employer: 

…may end the employment relationship by providing you with a minimum of two (2) weeks' notice or pay in lieu of notice, or such that is required by the Employ­ment Standards Act, which­ever is greater. In any event, we gua­rantee that you will be provided with compensation upon the severance of the employment relationship on a without cause basis which shall not be less than two (2) weeks per year of service. 

The Court found that the termination clause was ambiguous and hence unenforceable. The Court stated: 

The termination clause is ambiguous. The first provision for the greater of two weeks' notice or the entitlement under the Act standing alone sets a maximum or limit on compensation to be paid. The entitle­ment under the Act of course is statutory and does not require the contract of the parties. The guarantee portion of the termination clause in contrast does not set a maximum and therefore leaves open the interpretation that if, for example, reasonable notice were found to be less than a period of two weeks for each year of service, the plaintiff would have the protection of a minimum guarantee. 

Accordingly, the employee was held to be entitled to a significantly greater entitlement to severance pay in lieu of notice, based on the common law factors including age, length of service and duties and responsibilities. 

In contrast, in Finlan v. Ritchie Bros. Auctioneers (Canada) Ltd., also a 2006 decision of the British Columbia Supreme Court, the Court upheld a provision in an employment contract which specifically provided that the employee would receive one week's notice or payment in lieu for each year of employment. Since this contractual entitlement met the minimum requirement of the Employment Standards Act and clearly established that the contractual entitlement constituted a ceiling, and not a floor, the provision was held to be enforceable. 

The Finlan case is also important because the employee argued that the contract of employment, which provided for notice or severance pay in lieu based on the statutory employment standard requirement, was unconscionable and therefore unenforceable. However, the Court held that the mere fact that an employment contract provides for severance based on the statutory minimum does not, of itself, mean that the employment contract is unconscionable. The Court found that since the employee had sought out the position and applied for the job, the severance term was set out clearly in the hire letter, and the employee was given the time and opportunity to review the proposed employment contract, the Court could not find that the contract was unconscionable. 

These two recent decisions suggest that employers should ensure that the following steps are taken when negotiating and establishing contractual notice or severance entitlement provisions with prospective employees:

  • Ensure in negotiating a severance provision as a matter of contract that what is negotiated at least meets the applicable employment standards legislation requirements.
  • If the employer decides to limit the notice or severance pay in lieu requirement to that established in the applicable employment standards legislation, the employment contract should clearly state the employee's entitlement to severance or notice will be limited to such statutory notice or pay in lieu.
  • Ensure that the contractual notice or severance pay in lieu entitlement is established and agreed with the prospective employee immediately at or prior to the commencement of the employment relationship.
  • Ensure that the employee has had sufficient opportu­nity to review the offer of employment, including the contract severance terms, before being required to decide whether or not to accept the terms and the employment.

In addition, employers should also consider stating that the contractual severance term will continue to apply even where an employee is promoted or otherwise placed in a different position in the organization. This can be important because a court may well agree with an argument that the agreement on severance was intended to apply only to the position in question at the initial time of hiring.