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Severance packages: 6 steps to avoid disputes

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Letting someone go is never easy. Designing the right severance package can make things smoother for both sides. It can also prevent a termination from turning into a nasty and costly legal dispute.

“You want to put yourself in the best possible position to have certainty about what you owe an employee,” says Jodi Gallagher Healy, who practices labour and employment law in London, Ontario.

A severance package is the compensation that an employer gives a worker who is let go. Consider these six steps for designing a severance package. (Note this information isn’t legal advice. Ask a lawyer for guidance on your situation.)

1. Use employment contracts

Before an employee starts working, it’s a good idea to have them sign a customized employment contract that outlines what they will be paid on termination. Have your contract templates regularly reviewed by a lawyer because the law changes over time and they need to be carefully written to protect the company’s interests.

2. Terminating with cause

If you’re terminating the employee “for cause” (for example, willful misconduct, disobedience or neglect of duty), you may not need to pay the employee anything on termination (except for what they earned up until they were terminated and any accrued vacation).

Be aware that “just cause” is very hard to prove. You need solid documentation of a long history of serious performance issues that have been reviewed with the employee along with warnings, or a very serious single incident that causes a fundamental breakdown of the employment relationship.

3. Meet provincial requirements

If you’re not terminating “for cause,” you need to make sure your severance package complies with the minimum employment standards in your province or territory or the federal jurisdiction (whichever applies). Each jurisdiction has its own rules on the amount of advance notice of termination you need to give the employee and other requirements.

4. Consider reasonable notice

If the employee doesn’t have employment contract, they may be entitled to “reasonable notice.”

Reasonable notice is more generous than provincial minimum standards and is determined by individual factors, including the employee’s years of service, position held and age at the time of termination.

Older workers and those with a greater number of years of service will usually be entitled to a longer period of reasonable notice. A lawyer can give you a range based on similar cases and recommend severance package offers.

“One judge may say the person is entitled to six months, another might say eight months,” Gallagher Healy says. “That’s why we recommend using an employment contract from the outset—so you have greater certainty about what you owe an employee.”

5. Sweeten the pot

You can include extras in the severance package offer to make it more attractive for the employee and dissuade them from suing.

For example, you can offer outplacement services to help them get another job. You can also allow time off during the notice period for the person to go to job interviews. A letter of recommendation is also usually welcome.

6. Getting a release

In some cases, you can ask the employee to sign a release of all claims relating to their employment with you. (You should consult a lawyer about details.) A release can provide you with peace of mind about lingering legal disputes.

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