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Should Canada Rethink Severance?

David M. Brown

Co-Founder + Partner
January 11, 2022

For over 50 years, employment law has followed the same basic formula for calculating a dismissed employee’s reasonable notice period (commonly called severance compensation). Following the ruling in Bardal v. Globe & Mail Ltd. (1960), 24 D.L.R. (2d) 140, Canadian courts have long recognized that while there is no specific list of factors to consider, and each case must be decided on its own facts, the reasonable amount of severance must be decided with reference to (i) the character of the individual’s employment, (ii) their age, (iii) their length of service, and (iv) the availability of similar employment. 

Through thousands of wrongful dismissal actions, our judicial system has applied these factors over and over again, and as a result, a fairly stable range of outcomes has emerged. While there are certainly outliers, terminated employees will generally receive between 3 and 5 weeks of compensation for every year of service. There are a number of factors which modify this range, most notably a written employment agreement with severance-limiting language. Please do not consider this over-simplification of the principle as legal advice.

An overarching goal of severance is to allow the terminated employee sufficient time and resources to secure new employment. As well, severance has the secondary effect of creating increased job security for older and long-service employees, for the simple reason that it is more expensive to terminate a 55 year-old with 12 years experience than it is a 35 year-old with 2 years experience. 

With few exceptions, severance is subject to a duty to mitigate, which means that the terminated employee must make reasonable efforts to find comparable employment, and if they are successful in securing such employment, any new income received is offset against the amounts owed by the employer. That’s right… if an employee finds employment following termination, the employer that terminated the employee is the primary beneficiary of those efforts. 

So Why Should We Rethink Severance?

The Canadian economy looked a lot different in the early 1960s when Bardal came out. At that time, it may have been completely reasonable to expect that a long-service employee will need roughly one month for every year of service to find comparable work. 

Today, our economy has changed dramatically. Turnover is higher than it was in the past, and the time it takes to find a new job has been radically shortened. In fact, a number of recent surveys reveal that the time it takes to find new employment for a recently terminated employee is between 2-6 months, with 50% of people taking approximately 16 weeks to find new work. 

Additionally, our population is growing older, and with that comes increased acceptance of hiring older workers. Where a 55-year old may have had significant challenges finding new work in the 1970s, my own impression is that the barriers to older workers are not as high as they used to be. 

My theory on why we should reconsider severance is simple. In an economy where many professions are facing a skills shortage, and where the median period without employment is 16 weeks, what good is it to have a severance calculator telling someone that they may receive compensation well over one year? In the majority of cases, the terminated employee will find new work and will mitigate their losses. There is a disconnect, it seems, between what the law prescribes and the economic reality of the individual. 

This dichotomy has also resulted in a shift in strategy from employers. Knowing that most employees will find new work reasonably quickly, particularly if they are facing financial stress, many companies are adopting a “wait and see” approach to paying severance. Rather than issue large, up-front severance payments to workers, we are increasingly seeing employers hold-off on paying severance until the employee has found new work. Once the employee finds new work and damages are confirmed, employers may then negotiate a resolution, potentially saving themselves thousands of dollars.

Other Considerations

I have other reasons to be critical of our current severance regime. As I mentioned earlier, larger severance payouts create job security, but that security is highly discounted in an increasingly transactional economy, and arguably is not compensated at all if someone mitigates by finding new employment. It bears the question whether this loss of security should be compensated in an environment where severance is shrinking.

Our courts have also long recognized the impact that employment has on individual identity. After all, a job is rarely just a paycheque, it’s part of who we are. Our co-workers are rarely just colleagues, they are friends and form part of a larger community. In my opinion, our transactional severance regime does a poor job of making someone whole for this loss of self. While this point has been debated for decades, and while I acknowledge that there are some avenues for additional compensation, the majority of people are not compensated for this damage.

Conclusions

I’m not an academic, or a researcher, or a social scientist. I’m just a guy who works in the trenches of employment law, and from this humble pedestal, I think it’s high time to recognize that Bardal has served us well for the last 50 years, but it’s time to have another look at the practical application and consequences of our severance system.

Contact David to learn more about severance entitlements!