The Canadian Bar Association
Employment & Labour

Negotiate first to avoid unsatisfactory severance, bonus payouts

Employees should carefully review and negotiate their agreements before starting a new job to ensure their severance and termination clauses are acceptable, says Vancouver employment lawyer Richard Johnson.

Increasingly, court rulings are forcing parties to stick to the terms of their contracts unless there is "egregious" unfairness or a lack of clarity in termination clauses, says Johnson, associate with Kent Employment Law.

“They’re not going to meddle with contractual relationships between the parties unless something is illegal, unclear or ambiguous at the beginning,” Johnson tells AdvocateDaily.com.

“Employees and employers must be aware, if they don't negotiate a satisfactory agreement at the front end, they’re stuck with the liability at the back end.”

While most clients come to Johnson asking for advice after the employment relationship has gone sour, he says many individuals don’t take advantage of their negotiating power to come up with contractual terms that establish a fair outcome if the job comes to an end. He says many employers are more willing than ever to negotiate certain terms, including termination and severance, before hiring.

“Ideally you would go into the relationship with your eyes wide open, just like a house purchase or any other contractual arrangement,” Johnson says. “You wouldn’t dare sign a contract without reading it in any other kind of relationship.”

When an employee loses their job, the first step is to examine what severance they are entitled to under their contract, he says.  

“In recent court decisions, Ontario and British Columbia are leading the charge in the enforceability of termination clauses, and whether you get the minimum employment standards or some other severance can have a huge impact on your financial situation after the relationship ends,” Johnson says.

At default, employees are entitled to “reasonable notice” under common law, which runs on a spectrum of nothing to 24 months, he says.

Employers are entitled to limit payouts to the minimum employment standards, Johnson says, but as the Ontario Court of Appeal recently ruled in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII), they need to use “clear and unambiguous language.”

The other area that both employers and employees must be aware of in contracts is how bonuses are determined and paid out after the job ends, he adds.

“The courts are saying if you’re terminated, you’re entitled to reasonable notice at common law by default, including bonus,” Johnson says.

In Bois v. MD Physician Services Inc., 2016 ONSC 8133 (CanLII), the employee had signed a clearly worded contract that indicated workers must be actively employed at the time bonuses are paid, which meant he was not entitled to a claim of more than $114,000.

“Employers can again use clear, unambiguous language if they want to ensure an employee doesn’t get a bonus during the notice period, whether that’s statutory or common-law notice,” Johnson says. “But absent clear language in the contract at the outset, a worker is entitled to bonus over the notice period. So employers could be paying out massive bonuses because they didn’t clearly exclude it from a severance entitlement.

“That could all be covered in front-end negotiations in the formation of the contract,” he says.

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