Can severance packages be paid in instalments instead of a lump sum? • How do courts determine if releases signed by employees are valid?
Can severance packages be paid in instalments instead of a lump sum?
Question: We’re a small firm that has recently terminated a number of employees. Because of the high total value of the packages, it would seriously drain the company’s financial reserves to pay it in a lump sum. Is it possible to pay in instalments?
Answer: Mass terminations and their requisite severance payments can drain the employer’s financial resources. Lump-sum payments are usually made to junior employees and their severance packages will be relatively small.
Other employees might be paid every two weeks or on a monthly basis. If severance is paid in instalments, the employer must still treat the payments as wages and make all required source deductions.
Payments should be made in a way that minimizes taxes for the employee while still fitting the employer’s business plan. Many employers provide severance packages to employees based on salary continuation for a fixed period of time.
A severance agreement based on salary continuation can stipulate that instalments will be paid at 100 per cent of the agreed amount until fully paid or until the employee secures alternative employment, whichever occurs first. This way the employer is able to limit its liability in respect of those employees who are marketable and are able to find alternative employment in relatively short order.
Other companies may prefer the administrative convenience and the one-time financial write off of paying severance in one lump sum, especially if the payment is a small amount. Some employers allow their employees a choice of how they would like to receive their severance payment.
Employers might also include a provision for an additional bridging payment if, at the end of the initial severance period, the employee is still not employed, subject to the employer being satisfied that reasonable efforts at re-employment have been made.
Other payments that should be included in the severance plan in addition to the lump sum or salary continuation payments include:
•Vacation pay. Upon termination, employees who have not used all of their vacation time are generally entitled to receive accrued and unused vacation pay. Most employment standards statutes prescribe minimum vacation entitlements, often as two-weeks’ vacation with pay calculated at four per cent of the employee’s total earnings for the vacation pay year. But employment standards statutes may also stipulate that the standards prescribed are “minimum” entitlements only, such that any greater right or benefit conferred by an employer under its internal vacation-pay policy will prevail over the minimum employment standard. Employers who wish to avoid paying more than a minimum statutory accrual will need to institute a separate policy concerning vacation entitlements earned during the termination year.
•Continuation of group insurance premiums. This is mandated in some provinces for the period of minimum notice. While employers may wish to offer this benefit for a longer period of time as part of a severance package, they should only do so after consulting the insurance provider to ensure that such action is permissible under the terms of the insurance plan. Most benefit continuation plans of this nature will exclude coverage for long- and short-term disability insurance.
How do courts determine if releases signed by employees are valid?
Question: What will courts look at in determining whether or not a release signed by an employee is valid?
Answer: There are a number of factors courts will consider:
•Is the language clear and specific? Unclear or overly sophisticated language can harm the validity of a release. Courts may consider the employee’s education and experience when determining if the employee understood what they were waiving.
•Was the employee made aware of his rights? The release must detail the rights the employee surrenders.
•Did the employee have enough time to review the release? The opportunity to weigh benefits and disadvantages and to seek financial and legal advice is essential.
•Did the employee seek advice? Courts are more likely to uphold a release if the employer has advised employees in writing to seek legal counsel. Some lawyers will suggest, in appropriate circumstances, that the employer offer to pay an amount to the employee to cover the cost of obtaining an independent legal opinion.
•Was there an opportunity for negotiations? It is important for the company to be able to show that individual employee negotiations took place, taking into account individual employee concerns and situations. Employers should add employee requests, personalizing the release, to show that negotiations took place. This will emphasize that the employee understood and agreed with the terms of the release when he executed it.
•Was the employer’s conduct appropriate? The courts will also look at the employer’s conduct in terminating the employee — was the employer honest about the reasons for termination? In one case where an employee was told that his job had been eliminated, a court declared the release agreement to be null and void when the employee sued the employer after learning his job had not been eliminated, but rather was given to a younger recruit. The court ruled that since the employee settled for less than his full legal entitlement to notice and other termination benefits under false pretenses, his execution of the release agreement was not binding.
The above information was taken from Best Practices: Termination, published by Carswell. For more information visit www.carswell.com or call (800) 387-5164.
Question: We’re a small firm that has recently terminated a number of employees. Because of the high total value of the packages, it would seriously drain the company’s financial reserves to pay it in a lump sum. Is it possible to pay in instalments?
Answer: Mass terminations and their requisite severance payments can drain the employer’s financial resources. Lump-sum payments are usually made to junior employees and their severance packages will be relatively small.
Other employees might be paid every two weeks or on a monthly basis. If severance is paid in instalments, the employer must still treat the payments as wages and make all required source deductions.
Payments should be made in a way that minimizes taxes for the employee while still fitting the employer’s business plan. Many employers provide severance packages to employees based on salary continuation for a fixed period of time.
A severance agreement based on salary continuation can stipulate that instalments will be paid at 100 per cent of the agreed amount until fully paid or until the employee secures alternative employment, whichever occurs first. This way the employer is able to limit its liability in respect of those employees who are marketable and are able to find alternative employment in relatively short order.
Other companies may prefer the administrative convenience and the one-time financial write off of paying severance in one lump sum, especially if the payment is a small amount. Some employers allow their employees a choice of how they would like to receive their severance payment.
Employers might also include a provision for an additional bridging payment if, at the end of the initial severance period, the employee is still not employed, subject to the employer being satisfied that reasonable efforts at re-employment have been made.
Other payments that should be included in the severance plan in addition to the lump sum or salary continuation payments include:
•Vacation pay. Upon termination, employees who have not used all of their vacation time are generally entitled to receive accrued and unused vacation pay. Most employment standards statutes prescribe minimum vacation entitlements, often as two-weeks’ vacation with pay calculated at four per cent of the employee’s total earnings for the vacation pay year. But employment standards statutes may also stipulate that the standards prescribed are “minimum” entitlements only, such that any greater right or benefit conferred by an employer under its internal vacation-pay policy will prevail over the minimum employment standard. Employers who wish to avoid paying more than a minimum statutory accrual will need to institute a separate policy concerning vacation entitlements earned during the termination year.
•Continuation of group insurance premiums. This is mandated in some provinces for the period of minimum notice. While employers may wish to offer this benefit for a longer period of time as part of a severance package, they should only do so after consulting the insurance provider to ensure that such action is permissible under the terms of the insurance plan. Most benefit continuation plans of this nature will exclude coverage for long- and short-term disability insurance.
How do courts determine if releases signed by employees are valid?
Question: What will courts look at in determining whether or not a release signed by an employee is valid?
Answer: There are a number of factors courts will consider:
•Is the language clear and specific? Unclear or overly sophisticated language can harm the validity of a release. Courts may consider the employee’s education and experience when determining if the employee understood what they were waiving.
•Was the employee made aware of his rights? The release must detail the rights the employee surrenders.
•Did the employee have enough time to review the release? The opportunity to weigh benefits and disadvantages and to seek financial and legal advice is essential.
•Did the employee seek advice? Courts are more likely to uphold a release if the employer has advised employees in writing to seek legal counsel. Some lawyers will suggest, in appropriate circumstances, that the employer offer to pay an amount to the employee to cover the cost of obtaining an independent legal opinion.
•Was there an opportunity for negotiations? It is important for the company to be able to show that individual employee negotiations took place, taking into account individual employee concerns and situations. Employers should add employee requests, personalizing the release, to show that negotiations took place. This will emphasize that the employee understood and agreed with the terms of the release when he executed it.
•Was the employer’s conduct appropriate? The courts will also look at the employer’s conduct in terminating the employee — was the employer honest about the reasons for termination? In one case where an employee was told that his job had been eliminated, a court declared the release agreement to be null and void when the employee sued the employer after learning his job had not been eliminated, but rather was given to a younger recruit. The court ruled that since the employee settled for less than his full legal entitlement to notice and other termination benefits under false pretenses, his execution of the release agreement was not binding.
The above information was taken from Best Practices: Termination, published by Carswell. For more information visit www.carswell.com or call (800) 387-5164.
