We are told that in almost every organization human resources is under pressure to find cost savings. A growing, but in our experience still under-utilized, method of accomplishing real savings for the organization is through the use of employment agreement or offer letter provisions that define the severance owing on termination. A recent BC Court decision reinforces the efficacy of that strategy.

Employment agreements can provide employees with only the Employment Standards Act minimum severance on termination. These agreements modify what would otherwise be an obligation to provide an employee with reasonable notice of termination and can greatly reduce severance costs for employers. Reasonable notice is often 50% to 90% greater than ESA notice. 

Employers need to consider the effect of severance agreements on recruitment and retention. ESA termination provisions are not suitable in all circumstances for all employees but in some organizations or for some employees the use of these provisions can achieve real savings.

Fixing the severance obligation in an agreement or letter also creates greater certainty for employers. Employers can then more precisely predict severance costs.

The savings and certainty could be particularly advantageous with the elimination of mandatory retirement. Our Courts have limited experience in determining reasonable notice periods for terminated employees over 65 so there is more uncertainty. Fixing a contractual severance entitlement, whether it is the ESA requirement or something greater, will very likely reduce an employer's risk and costs of termination.

The trick for employers is ensuring that the severance provision is properly implemented and maintained. The BC Supreme Court recently upheld an employment agreement that provided for only the ESA minimum severance. The employee's claim for 12 months' severance was rejected and he only received 7 weeks of severance. 

The employee challenged the enforceability of the agreement. The agreement did not say that the employee was entitled to "only" the ESA requirement. The employee argued that as a result the provision did not limit his severance to ESA and that he should also be entitled to reasonable notice. The Court held that the language was not ambiguous and that it meant that the employee only received the ESA minimum severance.

The employee argued that the clause was unconscionable or unfair. The Court considered the circumstances around the signing of the agreement and rejected this argument too. The employee received the contract 24 hours in advance and had time to consider it before signing. The employer had not explained the clause to him before he signed the agreement but the Court held that the employer was not obligated to explain each provision. 

The employee also argued that because he had changed jobs, the agreement no longer applied to him. He had changed jobs over the years and the agreement had been renewed on each occasion except the final job change. However, the final job change only involved the employee going from being a Client Services Manager to a Senior Client Services Manager. The Court held that this was not a sufficient change in his employment to undermine the enforceability of the agreement.

Therefore, despite some warts in the manner in which the employer had managed the employment agreement, the employer was still able to rely on the employment agreement to greatly reduce its severance obligation. 

Employment agreements can result in meaningful savings for employers in severance costs. In using such agreements employers should:

  • make sure the clause is clear – it does not need to be lengthy or complicated and in fact simple is often best,
  • give the employee the contract in advance of being required to sign it and give the employee reasonable time to consider the clause (what is reasonable depends on the circumstances),
  • ensure that the employee signs the contract before starting work,
  • if there are significant changes in the terms and conditions of employment, take steps to ensure that the agreement or a new agreement is in place. Fresh consideration may be necessary to include a new termination clause.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.