Riding the Recession Wave: Voluntary Severance Packages

Cancelling the delivery of its $50 million Dassault Falcon 7X and reducing its fleet from five to two jets were Citigroup’s responses to crushing losses. Less luxurious retrenchment has typified corporate efforts, with employee cutbacks dominating the list of survival strategies. But not all have subscribed even to that strategy. As the Massai proverb states, “Daylight follows a dark night,” and so some companies, poising themselves for the rebound, are doing what they can to preserve their workforce with modifications.

Layoffs, job-sharing, reduced hours, elimination of bonuses, unpaid vacations, retraining, subcontracting, and home and virtual offices comprise those companies’ cost-cutting arsenal. All such efforts signal changes to the employment contract and are subject to challenge. Caution and skilful negotiation will ensure that liability for these adjustments is avoided.

Temporary Layoffs

In the absence of industry practice, there is no general right to temporarily layoff employees. If layoffs proffer the necessary relief, obtaining the employee’s consent will discharge the employer of liability. Today’s recession-rattled employee may be willing to forfeit his legal rights for this prospect of re-employment.

This strategy was successfully employed in the recession of the 1980s. In 1982, Citation Cabinets, facing a strike and shortage of work in British Columbia, negotiated layoffs. Its Superintendent, Dennis Haverstock, accepted a temporary layoff, subject to recall when needed. While on layoff, he secured alternate employment and sued Citation for severance. Citation successfully relied on this agreement.

Having lost a major client, B.C.’s Fraser Collection Services laid off Michael Davies. Within two months, when business recovered, Fraser offered to re-employ him. Davies declined. Although his layoff was tantamount to a termination because the company had communicated its intention to recall him honourably and reasonably, he was obliged to return to work for the balance of the notice period. His failure to return to work significantly reduced his severance entitlement.

Modifying the Position

As companies adapt to the economic crisis, changes will be reflected in individual positions, heightening claims of constructive dismissal.
Change can always be achieved with advance notice. If the required notice is too onerous, companies can negotiate the time-frame and transition with the affected employee. The era of entitlement is waning and security is more cherished than immediate gains. Once agreed to, any liability for changes is discharged.

Although such changes can signal a termination, such termination simultaneously triggers the employee’s obligation to mitigate his damages. If changes have been applied in an atmosphere of mutual understanding and respect, the employee may be forced to accept the new arrangement or abandon any hope of severance. Courts assess the exchange objectively. If the employer has acted reasonably, an employee who leaves because of changes to his employment, however significant, does so at his own financial peril.

Caution should be gleaned from the experience of Vancouver-based Atwater Insurance Agency, which reduced the salary of Louise Borsato by 20%. This is a threshold beyond which the courts will not impose the duty to accept the modified position, regardless of the civility with which it has been achieved.

Release Employees from Non-Competition Agreements

When Michael Davies was laid off, he treated himself as terminated. Having signed a non-competition agreement with Fraser Collection, he believed he could only look for work outside his industry. He didn’t find work and claimed the restriction effectively prevented his re-employment and thus mitigation.

Voluntary Severances

The recent elimination of mandatory retirement makes termination of older employees a violation of human rights. Offering limited voluntary severances, which may be acceptable to those close to retirement, allows the employer to cull and reshape its workforce without being discriminatory.

Howard Levitt is counsel in the Employment & Labour Law Group in Toronto. Contact him directly at 416-307-4059 or hlevitt@langmichener.ca.

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Ed.: This article, largely in this form, appeared previously in Howard’s weekly column on the first page of the Working section of the National Post.