The Increasing Costs of Terminating Older Employees

Severance pay for older employees

It has now been a decade since mandatory retirement was abolished in Ontario, and much has changed since then. Gone are the days when employers could transition out their workers over 65 to make room for their younger ones. Our laws have now evolved to recognize that employees are often capable of working well into their seventies and beyond. Mandatory retirement policies have virtually disappeared in the province.

This is not to say, of course, that older employees are guaranteed their jobs. As many followers of our blog will know, an employer can terminate your employment at any time, as long as it is not discriminatory and as long as they pay the appropriate severance.

For a termination to be discriminatory, an employee needs only to prove that the decision to terminate their employment was partially motivated by their age. If discrimination is found, then the employee may be entitled to compensation for discrimination and loss of dignity and self-respect.

There are many cases, however, where an employer may have an entirely legitimate reason to dismiss an older employee, and that reason may not have been discriminatory. In that case, the company will not be exposed to human rights damages, but they will likely still owe that employee significant compensation for severance.

As discussed in previous posts, both an employee’s age and their length of service are critical considerations in determining how much severance one is owed at law. The older an employee is, and the longer they have spent in a company’s employ, the more severance they will be entitled to. For an older employee who has spent his or her entire working life working for one company, their entitlements to severance are often substantial.

Employment lawyer Alex Lucifero discusses severance pay for long-term employees on CTV News.

For example, in the Ontario case Lalani v. Canadian Standards Assn., a 60-year-old Assistant Operations Manager with almost 39 years’ service was awarded 2 years’ pay. In another Ontario case, Ozorio v. Canadian Hearing Society, a 60-year old regional director with 30 years’ service was also awarded 2 years’ pay and benefits. The severance in Ozorio was worth hundreds of thousands of dollars.

Employers have options to limit their liability. The most effective way to reduce a company’s liability is to have its employees agree to a termination clause that lawfully restricts their entitlements to the minimum statutory amounts. It is highly advisable to have an employment lawyer assist in this regard. Providing an employment contract to an existing employee needs to include “consideration” in order to be enforceable, and the technical legal requirements for termination clauses have been subject to continuous changes.

There are also options for employers to save money in the way that severance is paid. The first option is to pay out the majority (or in some cases, all) of the employee’s severance by way of working notice. That way, the company can still retain the benefits of the employee’s work while still meeting their legal obligations for severance. While this option may seem like a great alternative to paying out severance, it is rarely the best solution from a practical standpoint. Having employees remain at work who know that their tenure is coming to an end is likely to severely impact the company’s overall morale, and it is usually a safe assumption that an employee who is working out a notice period will not deliver the same quality of work that they previously did.

In The News
Ontario man claims age discrimination is barring him from post-stroke treatment
US chain to pay $12M over age discrimination
Alberta human rights protection to be fully extended to age discrimination

Another option for employers is to pay out the severance by way of salary continuance. By paying out severance as a salary continuance, an employer can effect the termination immediately and still avoid the financial impact of a large lump sum payment. An employer may also be able to prevent an employee from obtaining a double recovery by inserting a “clawback” clause. A “clawback” clause would reduce the amount of severance owed in the event that the employee finds a new job before the end of the salary continuance period (e.g. payment of 50% of the remaining balance). Employers can increase the chances of a clawback clause being triggered by providing the dismissed employee with reference letters and/or outplacement counselling.

There are benefits to the lump sum approach as well. Most significantly, an employer who pays out a severance package in a lump sum will often be able to justify applying a discount to account for the possibility that the employee might find a job during the applicable notice period. Employees are unlikely to accept such a discount if severance is paid by way of salary continuance. For that reason, an employer who is able to pay severance in a lump sum will often be able to save a significant amount of money compared to employers who pay severance by way of working notice or salary continuance. Paying by way of lump sum also relieves the employer of having to continually monitor its dismissed employees to ensure that they are dutifully reporting any alternative employment that has been secured.

No matter what approach is used, it is important for employers to seek the advice of a qualified employment lawyer before making any decision. There is no one-size-fits-all when it comes to paying out severance, particularly when it comes to older employees.

Takeaways for employees:

• An employer requesting you to “retire” when you have no intention of doing so is terminating your employment, and will likely owe you significant severance and potentially human rights damages.

• Be aware that if an employer asks you to sign a new employment contract, the company may be attempting to disentitle you from significant termination entitlements – especially if you are an older employee with a long tenure. It is important to speak with an employment lawyer to understand what it is you are agreeing to before you sign.

• The vast majority of severance packages offered are severely inadequate. Never accept a severance package without speaking to an employment lawyer first.

Takeaways for employers:

• Consider reviewing the company’s existing contracts for your older employees to limit the company’s liability upon dismissal. A well-drafted employment agreement by a qualified employment lawyer may save the company tens or hundreds of thousands of dollars in severance.
• Consider all three options for paying out severance: working notice, salary continuance, or lump sum payments. All three options have advantages and disadvantages.
• When terminating an older employee with few transferable skills, consider offering a reference letter and/or outplacement counseling. The sooner the dismissed employee finds comparable employment, the less the company will be exposed to damages for wrongful dismissal.