How Economic Conditions Impact Severance Package

The recent downturn in economic conditions in Canada (as well as the United States) will significantly impact the financial spending and plans many businesses. In turn, many workers will likely experience the impact of the economic headwinds on the operations of their employers, including potential employment layoffs, terminations and reduced hiring levels.

Simply put, negative economic conditions can have a significant impact on businesses and employees alike. One area where this impact is often felt is in the realm of severance pay upon termination of employment. This blog article will explore how economic conditions can influence an employee’s entitlement to severance pay in Ontario.

How Economic Conditions Impact an Employee’s Severance Pay Entitlements

Generally, an employee’s entitlement to severance pay is not directly tied to the economic climate. If an employee is terminated without just cause, they are typically entitled to a reasonable notice period or severance pay, regardless of the state of the economy. In other words, employers will not be entitled to rely on financial difficulties arising from an economic downturn as an excuse not to pay (or to pay less) severance pay to an employee upon termination.

Factors Affecting Severance Pay

However, economic conditions can indirectly affect severance pay through several factors. Specifically, the courts in dealing with a wrongful dismissal claim or constructive dismissal claim will consider the following factors that were established in a leading case called to determine the amount of an employee’s reasonable notice of termination (or severance package): age, length of service, character of employment, availability of similar employment), which are now commonly referred to as the “Bardal factors”. These factors have been recognized by the Supreme Court of Canada as the proper method to be used when calculating a dismissed employee’s reasonable notice period under common law. However, at all times, the objective is to conduct an individualized assessment of the factors that will impact the dismissed employee’s ability to find new work.

In terms of the “character of employment” and “available of similar employment” analysis, many employers sometimes consider the following circumstances as a reason to convince an employment lawyer during severance package negotiations (or a wrongful dismissal claim) to reduce the amount of an employee’s severance package:

Company Performance: During economic downturns, companies may experience financial difficulties that lead to layoffs or restructuring. In such cases, while on a practical level, employers may consider their negative financial situation when determining the amount of severance pay, as a legal matter, an employer’s financial circumstances are irrelevant.
Job Market: A weak economy can make it more difficult for employees to find new employment. This may lead to a longer reasonable notice period or a larger severance package to financially compensate for the increased difficulty in finding a new job.
Industry-Specific Factors: Some industries may be more heavily impacted by economic downturns than others. This can affect the availability of comparable employment and, consequently, the amount of financial compensation an employee is entitled to receive in a severance package.

However, the courts have been specifically clear that the relevant factors set out in Bardal are concerned only with the circumstances of the employee and not those of the employer:

It is important to emphasize, then, that an employer’s poor economic circumstances do not justify a reduction of the notice period to which an employee is otherwise entitled having regard to the Bardal factors…Thus, even assuming that the respondent was suffering financial difficulties when it dismissed the appellants, the motion judge erred in concluding that the period of notice to which the appellants were entitled should be reduced as a result. That conclusion is neither required by the case law nor consistent with the nature and purpose of an employee’s right to notice.

Take-Away Lessons

For Employers – When planning and implementing mass restructuring or business restructuring plans, employers must keep in mind that Ontario employment law requires them to provide adequate reasonable notice (or pay in lieu thereof) to affected employees, without regard to the organization’s financial struggles. A proactive approach may stave off expensive lawsuits for wrongful dismissal which the employer’s purported financial difficulties are found to be irrelevant. Typically, the best excuse for an employer to reduce an employee’s severance package is to have a valid employment contract with a termination clause restricting their severance pay entitlements.
For Employees – Employees should always obtain the legal advice and representation from an experienced employment lawyer in Toronto to avoid falling for an employer’s tricks or arguments that its financial struggles justify a lesser severance package.

Book a Consultation with an Employment Lawyer in Toronto

At Bune Law, we understand and are familiar the complexities of workplace law and are committed to helping both employers and employees navigate these challenges. Whether you are an employer or employee dealing with employment contracts, workplace disputes like a wrongful dismissal or constructive dismissal, or simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

Book a confidential consultation with our Toronto employment law firm to protect your legal rights to understand your options and protect your rights.

Why Choose Bune Law When You Need an Ontario Employment Lawyer?

Experience in all areas of workplace law, including wrongful dismissal claims, constructive dismissal claims, severance package reviews, severance package negotiations, discrimination and human rights disputes, and employment contract reviews.
Proven track record of successfully resolving workplace disputes through negotiation, mediation, and employment litigation.
Compassionate and personalized approach to each case, ensuring tailored solutions that meet your specific needs.

If you need a Toronto employment lawyer who is committed to delivering strong results and proactive solutions, please contact Bune Law online or by phone today at 647-822-5492.