November 27, 2014

Terminal City Club

Severance Practices in Canada: Survey Results

and Legal Tips

Agenda

• Trends in restructuring• Current developments in terminations,

severance and career transition

• Legal considerations and best practices including:

• Severance format options: pros and cons

• What the law requires employers to include in severance packages

• How to secure additional protections such as non-competes as part of severance

2

Survey Participants

3

Organization Size

4

Workforce Changes – Past and Future

• Past - 87% reported employee terminations same as or higher than previous 12 months

• Future - 78% reported employee terminations same as or higher in the coming 12 months

5

Reasons for Change

6

1. Organization Structure Change 59%

2. Individual Performance 58%

3. Business Strategy Change 29%

4. Financial Reasons 28%

Coming 12 Months

Pretty much the same…

Previous 12 Months

Termination Planning – Large Downsizing

60% have a detailed plan for large downsizings (28% have broad plan)• Ideal amount of time for planning is more than a

month

Common reasons for insufficient project planning… it’s a 3 way tie

• Not enough time • HR told too late• Too many priorities

• an aside… 20% cited Inexperienced Management

7

Termination Planning – Individual

58% have a detailed plan for individual terminations (39% have a broad plan)• Ideal amount of time for planning is a week or more

• Even a week isn’t always possible, so HR needs to be ready with established processes, templates, etc.

8

Severance Structure

Exec Mgt Prof Other*

Lump Sum65% 66% 63% 59%

Full salary continuance to end of severance period (no claw back) 29% 27% 20% 16%

Salary continuance with partial payment of balance upon new job 14% 17% 13% 8%

Salary continuance stops upon new job 6% 6% 6% 5%

Mix/choice of lump sum and salary continuance 19% 17% 12% 7%

9

*Support, Hourly or Union Employees

Typical Severance Per Year of Service

Exec Mgt Prof Other*

1 week 4% 8% 12% 28%

2 weeks 5% 15% 30% 45%

3 weeks 9% 29% 33% 19%

1 month 63% 44% 23% 8%

More than 1 month 19% 4% 2% 0%

10

*Support, Hourly or Union Employees

What do Top Employers do Differently?

• Detailed plan for large downsizings (77%)• Follow established process for individual

terminations

• Severance Packages: More likely to include benefits continuation Use non-compete and non-solicit clauses Provide Career Transition support

11

Client Examples

International telecommunication company• Dedicated resources• Detailed project plan

• Seek out external support

BC-based tech company• Detailed schedule• Employee choice

• Employees re-join

12

Why Career Transition Support?

Top Reasons Cited:

1. Right thing to do - 67%

2. Terminated employees to receive job search skills (to land another job faster) - 59%

3. Send a positive message to remaining employees - 48%

13

Career Transition Support

Criteria used to decide length of career transition support:

1. Job Level - 66%

2. Length of service - 51%

3. Age of the employee - 43%

4. Expected difficulty of job search - 41%

14

Career Transition Support

Criteria used in choosing a career transition provider:

1. Quality of Consultants - 95%

2. Quick Response Time - 91%

3. Program Features - 87%• Ability to customize

15

Terminations – Best Practices

Questions to ask:•Is my employee being treated with care and respect? •Has the process been thoughtfully planned and skillfully conducted?

•Have I done what I can to preserve my company’s reputation?•Have my company’s legal and ethical responsibilities been fulfilled?

16

November 27, 2014

Terminal City Club

Severance Practices in Canada: Survey Results

and Legal Tips

18

Introduction

We will cover:

A. Why consulting legal counsel pre-termination can save you money

B. The pros and cons of various severance formats

C. What you need to include in severance packages besides salary

D. How to secure additional protections

Why Consult Legal Counsel before Termination

• Why Consult Legal Counsel before Termination• High Risk Circumstances for Termination: A lawyer

can help identify high risk terminations and recommend alternatives, e.g.:

• Employee on or returning from maternity leave

• Employee being terminated for misconduct related to a substance addiction

• Employee being terminated for lengthy absence on sick leave

19

Why Consult Legal Counsel before Termination

• Better understanding of severance liability: Allows you to properly budget for the cost and avoid upsetting an employee with a low-ball offer

• Further Warnings: Where terminating for cause, you may need to do further warnings

• Checking for existence and and/or validity of termination clause

• A few hundred dollars of advice in advance can avoid tens of thousands of unplanned severance liability

20

Pros and Cons of Severance Formats

• Lump Sum• Pros

• Is preferred by most employees

• Allows for a “clean break”

• Employers can usually settle for a lump sum which is 66% - 80% of estimated Reasonable Notice Period (“RNP”)

N.B. Note under recent case law, termination clauses calling for “notice or pay in lieu” have been interpreted as calling for a lump sum payment

21

Pros and Cons of Severance Formats

• Lump Sum• Cons

• Can over compensate employees who re-employ early

• In some organizations, lump sum severance cannot be combined with pension and benefit accrual

• Imposes heavy cash-flow hit up front without creating any incentive for employee to honour post-employment obligations

22

Pros and Cons of Severance Formats

• Continuation with no Clawback on Re-Employment• Pros

• Spreads cash flow impact

• Can more easily be linked with pension and benefit continuation

• Can still be discounted from estimated reasonable notice

• Creates an incentive for employee to comply with post-termination obligations

23

Pros and Cons of Severance Formats

• Continuation with no Clawback on Re-Employment• Cons

• ESA minimums need to be paid up-front in lump sum with payroll then re-activated

• Involves longer administration of severance

• Less popular with employees

• If pension and benefits continue, payments not eligible for rollover to RRSP

24

Pros and Cons of Severance Formats

• Continuation with Clawback on Re-Employment• Pros

• Creates the opportunity to save on severance costs if employee re-employs early

• Same as for continuation without clawback

• Cons• Case law says such offers must be “at the high end of

the range”

• There is currently no practical way to monitor the employee’s job search efforts

• Many employers report employees always draw entire severance

25

What Needs to be Included in Your Severance Package beyond Salary?

• If there is a termination clause, what needs to be included should be defined in the clause:

• If clause calls for “notice or compensation in lieu” the general rule that all components of compensation package over the notice period must be included

• Some clauses will say “salary only”

26

What Needs to be Included in Your Severance Package beyond Salary?

• If no termination clause, covering what needs to be included, courts require continuation or compensation for all elements of compensation package over RNP. This will include:

• Group benefits coverage

• Beware of potential employer liability for life and disability coverage

• Pension Accrual or Employer RRSP contributions

• Car allowances, but only to the extent they are a taxable benefit

27

What Needs to be Included in Your Severance Package beyond Salary?

• Commissions and Bonus:• Check plan terms and any Employment Agreement to see if

liability is excluded• The courts require very clear language to avoid liability• A requirement to be “actively employed” is generally

considered satisfied during the RNP• To avoid liability, plan must exclude entitlement on date of

receipt of notice of termination or explicitly rule out any period of non-worked notice

• Even “discretionary” bonuses can sometimes be awarded

• Stock Options: Unless the Stock Option Plan or Agreement is very explicit, courts will generally deem vesting to continue over the RNP

28

How to Secure Other Protections as Part of a Severance Package

• The survey tells us that as many as 50% of employers want non-compete covenants for Executives and Managers:

• Step One: Check if employee has already signed non-compete/ solicit/confidentiality covenants (“NCA”)

• If so, have your lawyer check that the clause is at least potentially enforceable (there are no guarantees)

• If it is not, consider substituting a more limited but more enforceable covenant

29

How to Secure Other Protections as Part of a Severance Package

• Step Two: If no NCA has been signed, realistically you will have to offer additional compensation

• Step Three: Draft severance offer to:

• Explicitly offer separate compensation for the NCA

• Make severance payable in continuance format to incentivize compliance

• Pay extra compensation for NCA at the end of the period of protection under the NCA

N.B. Normally it is possible to include a confidentiality covenant without paying additional compensation

30

Conclusion

• Good legal advice pre-termination can help you:

• Select the optimal severance format

• Include all required forms of compensation

• Secure additional covenants to ensure a successful termination

31

Thank You

montréal • ottawa • toronto • hamilton • waterloo region • calgary • vancouver • beijing • moscow • london

J. Geoffrey Howard, PartnerGowlingsTel: 604-891-2279Email: geoffrey.howard@gowlings.com

Michael Shalke, AssociateGowlingsTel: 604-891-2282Email: michael.shalke@gowlings.com

Peter Saulnier, PartnerLogan HRTel: 604-687-8607 Email: peter.saulnier@LoganHR.com

Liz Grant, Senior ConsultantLogan HRTel: 604-687-8607Email: liz.grant@LoganHR.com