Negotiating Enforceable Severance and Employee Restriction Provisions  

publication 

November 2007 - (AceTech CEO Snapshots )

AceTech CEO Snapshots
Employers are generally aware of the advantages of negotiating specific termination entitlement provisions with new employees, rather than leaving severance obligations to be decided by the courts in accordance with common law principles. 

By negotiating severance entitlement provisions, employers are able to determine and control possible future termination costs. This is an important consideration because, if absent, the obligations imposed upon employers by the courts can be extremely onerous. 

Under Canadian common law, an employee who is terminated without cause is entitled to receive reasonable notice of termination or a severance payment in lieu of notice. Severance in lieu of notice, as determined by the courts, can include not only the salary the employee would have received 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. 

Under common law, reasonable notice typically ranges from less than one month to approximately 24 months, depending on factors such as the age of the employee, length of service, duties and responsibilities within the organization, whether the employee was induced to leave his or her previous employment, and the anticipated difficulty of the employee finding new employment after termination. While there is a widely held perception that the court's calculate notice or severance on the basis of one month's notice (or severance in lieu of notice) per year of employment, this rule of thumb is nothing more than a rough maxim at best. Especially in the case of managerial or technically skilled employees, the notice or severance in lieu requirement as set by the courts at common law can easily commence at six months and progress upward from there. 

Also, there is an increasing awareness among employers that "non-solicitation" and, in certain cases, "non-competition" provisions may be critical to protect the interests of employers. While non-competition agreements are often frowned upon by the courts, and may be struck down as unenforceable, non-solicitation provisions are commonly held to be enforceable. 

Recent Canadian court decisions continue to illustrate the courts' inclination to strictly construe employment provisions which place restrictions on employees and limit severance entitlements against employers. Accordingly, to increase the likelihood that negotiated severance entitlement provisions and non-solicitation or non-competition restrictions will be enforceable, there are certain pitfalls which employers should take care to avoid. 

First, it is extremely important for employers to negotiate severance provisions, and any other provisions restricting or limiting employee conduct, prior to the time that the new employment relationship commences. There are many recent decisions where the courts have held that such provisions are unenforceable because they were imposed or agreed upon after hiring. If it is not possible to reach an agreement on such issues prior to employment, it is important that employers specifically confirm that the terms of employment are subject to reaching final agreement on severance provisions or other terms which may remain outstanding. 

Second, employers should consider specifically providing that the contractual severance provision or other provisions which limit employee conduct will continue to apply even where the employee is promoted or otherwise transferred to a different position within the organization. This can be important because the courts, in more than a few cases, have held that negotiated severance provisions were unenforceable on the grounds that they were only applicable to the position in question at the initial time of hiring. 

Third, it is critical that any negotiated severance provision must at least meet the statutory employment standards requirements applicable in the province of engagement. Any severance provision which does not meet or exceed the statutory requirements will be held by the courts to be unenforceable. 

Given the importance of incorporating severance provisions, and possibly non-solicitation or other restrictive covenants into an employment agreement, is it possible for an employer to negotiate such provisions after the employment relationship has commenced? 

Canadian courts have recently addressed circumstances where employers have negotiated severance or restricted conduct provisions post-hire. Consistently, these decisions have held that where such provisions or restrictions are negotiated post-hire, they will not be enforceable unless the employee has received "consideration" (i.e. a benefit) from the employer, in exchange for agreeing to such provisions. 

Accordingly, an employer who wishes to negotiate or vary the terms of a severance provision or other restrictive conduct provision post-hire, must provide some valuable benefit in exchange. It appears well settled that mere "continued employment" does not constitute sufficient consideration at law. Although each case is decided on its own facts, these decisions suggest that some more concrete entitlement will be required, for example, materially enhanced compensation, benefit terms or possibly the guarantee of continued employment for at least a specified period of time.