The law of severance is dynamic and at times confusing. One common misperception is the purpose of severance itself. Many people believe that a severance package is meant to be a reward or acknowledgement for years of dedicated service or a recognition for a job well done. Some very senior employees consider severance as part of their “retirement entitlement”. While employers are certainly within their rights to acknowledge excellence through a severance package, that is not the purpose of severance, nor is it what the law requires. The real purpose of severance is to tide the employee over while she looks for work. To understand how this works, a return to first principles is useful.
In employment law, an employer is entitled to terminate the employee’s employment at any time and for any lawful reason by providing notice of the termination. The amount of notice is determined with regard to the type of employment, the age of the employee and the availability of similar positions in the market. Notice can be provided by working notice, pay in lieu of notice or a combination of the two.
For example, under working notice, the employer essentially tells the employee, “Employee, your last day of work will be six months from today”. The purpose of that six months’ notice is to allow the employee to continue working while she looks for suitable replacement work. During this time, the employee will still show up to work each day, but it is expected that she may be excused to attend job interviews, career fairs, or meet with outplacement services.
Conversely, under pay in lieu of notice, the employer essentially tells the same employee, “Employee, your last day of work is today. In lieu of six months’ notice, we will pay you six months’ pay”. The purpose of that six months’ pay in lieu is to allow the employee to pay her expenses and maintain her lifestyle while she looks for suitable replacement work – all while not attending the workplace.
At common law, working notice is the default, although its use is becoming rarer given security concerns with information technology. The purpose in providing pay in lieu of notice is really more about preserving morale and avoiding the awkwardness and guilt associated with terminating an employee from their employment. For trustworthy and upbeat employees, working notice remains a good option.
What happens when an employer provides no notice at all or not enough notice? The failure to provide adequate notice gives rise to a right to sue for “wrongful dismissal” – which is essentially a lawsuit for money which is payable to the Employee to tide the employee while she looks for comparable replacement employment. Employers are permitted to terminate employees without any notice where the employee gives the employer cause, such as being disobedient (insubordination) or engaging in willful misconduct. “Cause” cases are rare. In most circumstances, wrongful dismissal lawsuits arise from the employer’s failure to provide adequate notice.
Severance entitlements create a lot of liability for employers of all sizes. Employers can limit that liability by limiting severance entitlements in a carefully drafted employment agreement. Templates pulled from the internet will almost certainly not suffice. For employees, many employment contracts may purport to limit entitlements, but are actually (sometimes hopelessly) unenforceable in the Courts.