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The bigger they are, the harder they fall

In times of economic uncertainty, it is common for companies to look to cut costs. This involves renegotiating supplier agreements so that prices become more affordable. It also involves a renewed scrutinization of the expenses the company wishes to incur. It can also involve making the decision to terminate the employment of certain staff. While going through with any of the above cost-cutting initiatives is always difficult, terminating staff can include one-time and on-going cost consequences.

Where the employment of an employee will be terminated without just cause, an employer company has the statutory and common law obligation to provide advance notice of termination or payment-in-lieu of notice of termination. In Ontario, the Employment Standards Act (the "Act") provides that an employee, where terminated without just cause, is entitled to notice of termination or pay-in-lieu of notice of termination. Pursuant to the Act, an employee's entitlement to termination pay ranges from at least one week of termination pay if the employee has more than three months of service, and at least 8 weeks of pay-in-lieu of notice where the employee has been employed for 8 or more years. For example, a five-year employee whose employment is being terminated without just cause would be entitled to receive five weeks of termination pay.

Pursuant to the Act, where an employee has been employed for five years or more and the employer has a payroll of $2.5 million or more, an employee is also entitled to severance pay in addition to termination pay. Using the example of the five-year employee above, such an employee would be entitled to receive an additional five weeks of severance pay upon termination of that employee’s employment.

But the amounts prescribed by the Act are only the minimum. An employee may still seek redress for wrongful dismissal at common law, alleging breach of contract. Such an action, if successful, will entitle the employee to recover damages. An employee may also have a written employment contract that varies his or her entitlement upon termination.

The main issue in a wrongful dismissal action is what constitutes reasonable notice of termination. This is a question of fact and depends on the specific circumstances of the employee. Such factors as age, years of service, level of education, position held, work record and other employee specific details will be reviewed by the court. Continuing to use the example of the five-year employee, an employer could be liable, in addition to its obligations under the Act, for another several months of pay pursuant to the common law. Multiply this liability by multiple employees and many companies may be nervous to make the decision to terminate their employees. But being advised of all of the risks and liabilities could assist the company in accomplishing its cost-cutting initiatives and deciding how to proceed.

Making the decision to terminate the employment of more senior personnel, such as an executive, comes with many more risks. In fact, as a general rule, the bigger they are, the harder they fall. Many executives have written compensation agreements which provide for a base salary, car allowance, stock options, bonuses and various other incentives. Such attractive compensation terms are obviously offered to executives since attracting and retaining top talent is key to running a successful business.

The golden parachute

Often times, executives have also negotiated various terms in their written compensation agreements which deal with payments that they could be entitled to upon the termination of their employment. When the payment is seen as a lucrative payout, these terms are often times referred to as a golden parachute package.

A golden parachute, as many of you know, is an agreement between a company and an employee specifying that the employee, who is usually an executive, will receive certain significant benefits if the employee’s employment is terminated. These benefits may include severance pay, cash bonuses, stock options or other benefits. The benefits would be payable in most instances regardless of whether the executive has performed to a successful degree.

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