Severance Packages (A. Bolstad)
Recommendation:That this report be received for information.
Report Summary
This report provides a response to an Administrative Inquiry regarding the City’s Severance Program.
Previous Council/Committee Action
At the May 8, 2001 City Council meeting, Councillor A. Bolstad made the following inquiry:
“This inquiry has to do with severance packages paid by the City of Edmonton to departing employees.
I would appreciate a report which details the following:
- Information documenting what appears to be the industry standard for severance packages, both for management and unionized staff.
- The steps the City can take to ensure that its severance packages do not exceed the industry standard.
- Any steps the City could or should take to develop severance packages that are less than the industry standard, given the relatively generous wage and benefit packages the City already provides as a conscientious employer."
Report
- Information documenting what appears to be the industry standard for severance packages, both for management and unionized staff.
The City of Edmonton undertook a “Severance Research Project” in 1996, with the intention of providing a comprehensive sampling of data, in order to determine emerging trends in severance compensation packages.
The following are key points from the analysis of that survey:
In-Scope (Unionized) Severance
Most severance programs for unionized employees are on a pro-rated basis, escalating with years of service. The average severance award contained in collective agreements is about two weeks per year of service, with a maximum payment of fifty-two weeks, payable in a lump sum. Some employers are providing an additional payment if the severed employee is over forty to forty-five years of age.
Those employees accepting in-scope severance packages typically sign off and waive all rights outlined in the collective agreement, such as recall, seniority, and redeployment. In some cases, layoffs with severance packages may be targeted (the employer can chose the individual to be laid off).
Out-of-Scope (Managerial-Professional) Severance
Many of the companies surveyed were reluctant to reveal the exact nature of their severance provisions, especially for the more senior managers. Some managers negotiate individual severance payment packages at the time of hire.
Most of the companies surveyed did provide typical bench marks for severance. Factors that are considered include years of service, reason for termination, salary, level of position in the organization, age, health, family situation, job market, and re-employment potential.
The typical severance provisions use one month per year of service as the standard, with variances for the above factors and with lower amounts for short-term lower level managers.
The typical severance caps in the managerial category range from twelve to fifteen months for lower level managers and to twenty-four months for higher level managers. Many companies provide more generous caps, but were not prepared to openly divulge the information.
Career counselling and outplacement services are provided, and typically cost between $2,000 and $4,000 per manager.
Many employers provide salary and benefits continuation during the period of severance, rather than a straight lump sum, which may assist in bridging service until pensionable age.
- The steps that the City can take to ensure that its severance packages do not exceed the industry standard.
Based on information in the Severance Research Project, other studies published by consultants and legal counsel, and regular review of new legal decisions regarding dismissals by the Law Branch, it appears that the City’s Severance Program for Management and Professional Employees is in line with industry standards.
There are no current provisions for severance for unionized staff in the collective agreements between the City and its Unions. A “one-time-only” severance program for unionized staff was agreed to between the City and the Unions for layoffs as a direct result of City ’97. All of the City ’97 layoffs have been finalized, and this severance program has expired.
While managers can be targeted for release from the City (with an appropriate severance package), the City must abide by the layoff language in the collective agreements that restrict how layoffs of unionized employees are conducted. The collective agreement may include provisions protecting senior members, allowing for recall rights, and granting laid off employees with a “general priority” for any position in the City for which the employee may be qualified for a two year period following the layoff.
- Any steps the City could or should take to develop severance packages that are less than the industry standard, given the relatively generous wage and benefits packages the City already provides as a conscientious employer.
In considering what sort of severance package should be provided, it is important to remember the legal basis which forms one of the major purposes behind severance programs for non-unionized employees. Severance programs are not designed to deal with employees who have given the employer what the Courts call "just cause" for dismissal. Just cause exists only in cases where the employee is guilty of sufficiently serious misconduct (such as theft from the employer), to justify immediate dismissal without compensation or notice.
In cases where the employer cannot justify just cause for dismissal, the existence of other good business reasons for dismissing does not allow the employers to dismiss the employee without notice or compensation. A need to downsize or reorganize, or conduct or performance problems with the employee which fall short of just cause, are not enough to justify reduced or no compensation to the employee on dismissal. Unless an employment contract specifically addresses what happens where the employee is dismissed without "just cause", the law implies into every non-unionized employment contract a provision that the employee will not be dismissed unless he or she either gives just cause for dismissal, or receives "reasonable notice".
Where employees are dismissed without just cause, and without reasonable notice, they can commence a lawsuit for wrongful dismissal. The damages awarded in such a lawsuit are based on the salary the employee would have been paid over the period of reasonable notice, and the value of the fringe benefits they would have received over the period of reasonable notice. One of the key purposes of any severance program for non-unionized staff is to allow the employer to provide sufficient compensation to the employees on dismissal to avoid unnecessary wrongful dismissal lawsuits and all the additional costs and risks associated with such lawsuits.
Council approved a Severance Program for Management and Professional Employees on February 4, 1997. The severance provisions in that new program were based on a thorough review of case authorities regarding wrongful dismissal. The formula for calculation of reasonable notice and the attendant compensation was designed to be close to what a Court would award if an employee, under the same circumstances, successfully sued for wrongful dismissal. The rationale was that the employee would have little incentive to sue, because the additional monies he or she might recover in a lawsuit would be outweighed by the costs incurred in suing. Attempting to reduce the severance packages because of the City's existing wage and benefit packages would render the program ineffective in meeting its key goal of avoiding unnecessary lawsuits. The damages awarded by the Courts are based on those wage and benefit packages and, as such, to be effective the severance package must also be based on the same wages and benefits.
Since the Severance Program for Management and Professional Employees was established in 1997, the Law Branch has routinely reviewed new case authorities regarding wrongful dismissal and has determined that there have been no trends in the law which would justify any substantial reductions in the severance program. Indeed, since the program was established, the Supreme Court of Canada has changed the law regarding wrongful dismissal. They have ruled that it is very important for employers to deal with the dismissal of employees in the utmost good faith, and with dignity. If an employer fails to do so, the Courts will increase the period of reasonable notice on which that employee's damages will be based. Now even more than before, failing to provide a reasonable settlement can end up costing employers considerably more in the long run, both in terms of legal costs and actual severance payments. The Court imposed requirement that employees are dealt with in dignity and good faith is new as a legal rule, but it does reflect the other key rationale upon which the current severance program was based. That purpose was, and remains, a desire to demonstrate to our current and potential future employees that we will in fact deal with them fairly and with dignity if their employment must come to an end for reasons other than just cause.
It should be noted that the list of factors that can go into calculation of reasonable notice periods is a long one, and there is always the potential that circumstances will arise in which the compensation provided for in the severance program is not adequate in a given case. Those unique cases will be dealt with on a case by case basis and any severance approved in accordance with the authority's delegated by City Council. It should also be noted that the severance program does not apply where the contract between the City and the employee specifically addresses what compensation will be provided on dismissal. In those cases, the severance is based on the contract, and its payment on dismissal reflects the simple honouring by the City of its existing contractual obligations.
As noted above, a formal severance program for in-scope employees does not currently exist. Under very specific circumstances, employees may be offered, on a voluntary basis, a maximum sixteen-week payment under the Voluntary Severance Program, in situations when employees are unable (for a number of reasons) to satisfactorily perform the functions of their position.
Background Information Attached
- Severance Program for Management and Professional Employees
Staff Hours to Prepare Report: 8.25 hours
Staff Cost: $744.00
Peripheral Cost:
Total Cost of Inquiry Preparation: $744.00
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